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NOTE: This graph assumes the strategy was established for a net credit.

The Strategy

Buying the put gives you the right to sell stock at strike price B. Selling the two puts gives you the obligation to buy stock at strike price A if the options are assigned.

This strategy enables you to purchase a put that is at-the-money or slightly out-of-the-money without paying full price. The goal is to obtain the put with strike B for a credit or a very small debit by selling the two puts with strike A.

Ideally, you want a slight dip in stock price to strike A. But watch out. Although one of the puts you sold is “covered” by the put you buy with strike B, the second put you sold is “uncovered,” exposing you to significant downside risk.

If the stock goes too low, you’ll be in for a world of hurt. So beware of any abnormal moves in stock price and have a stop-loss plan in place.

Options Guy’s Tips

Some investors may wish to run this strategy using index options rather than options on individual stocks. That’s because historically, indexes have not been as volatile as individual stocks. Fluctuations in an index’s component stock prices tend to cancel one another out, lessening the volatility of the index as a whole.

The maximum value of a front spread is usually achieved when it’s close to expiration. You may wish to consider running this strategy shorter-term; e.g., 30-45 days from expiration.

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