What is a put spread? On Fastmoney one of the celebs said he was gonna put on a put spread?

Answer 1

A put is an option the gives the buyer the right, but not the obligation, to sell a financial asset on, or before, a certain date. Fastmoney traders generally talk about equities, so the trader was probably referring to puts on a stock, American style. (American style just means that one may use the option on or before the expiration date, as opposed to just on the expiration date, which refers to European style.)

As you may guess, the seller (referred to as the writer) of the option has the obligation to buy the underlying asset (normally 100 shares of stock per 1 option) from the holder if that put is exercised on, or before, the expiration date.

A spread is an investing strategy in which the trader buys one option and sells another. All is identical between the two except that the expiration date is different, or the exercise price is different!

So, for a put spread, one would buy a given number of puts and sell the same amount of puts with different exercise dates or exercise prices. The trader was probably referring to a spread with different exercise prices. I will use an example.

Apple Computer (AAPL) is currently priced at around 199.83. If you sold one Jan. 190 put, and bought one Jan 210 put, then you would have on a put spread. I am buying one right to sell this stock at 210, but also saying that I will buy the stock from someone else at 190. Of course, if the price remains above 190, the investor on the other side of that put will not want to sell to me at 190 because his stock is worth more. I have made the premium in this case. Additionally, I can sell the stock at 210, and if the price is below 210 this is indeed what I will do.If it is above it, then I will not, and I will be out the money I paid to the seller of the 210 but will have taken in money from the buyer of the 190 put.

If it goes below 190, then I must buy at 190 but can sell at 210. If it goes above 210, then nothing will be exercised. If it stays between the two, the buyer of the 190 will not exercise, but I will, at 210.

I hope I have explained what exactly the trader on the show was talking about. Often terms are thrown around and the context is very important. A calendar spread, in which times are different, would have the same exercise prices but different dates of expiration. I will include the link to the yahoo finance section of the AAPL option chain. The best way to learn is to come up with different scenarios and you will become quicker at it as you practice. Contact me if I was not clear or you have questions. Happy trading!

Answer 2

its an option strategy. I didn't watch fast money, so I have no idea what the context of the statement was...but the general idea is as follows:
A Bull Put Spread is where you anticipate the underlying asset (usually a stock) to have a moderate increase in price, if any at all. The Investor buys a put option on the stock, and then sells a put option on the stock with a Higher strike price. The short put option is intended to expire out the money so the Investor retains the premium. If it doesn't, than the long put option can be exercised to cover the short position. This is also called a credit spread too...
A Bear Put option is similar to the Bull Spread, except the Investor is anticipating the underlying asset to decrease in value. In this, you purchase a long put option, and sell a short put option below that of the long position. If the stock rises in value, you have the long position to cover you.

Hope this helped.

Answer 3

A put spread is any combination of put options on the same underlying where at least one of the positions is long and at least one of the positions is short.

The first two answers gave you two of the possible put spreads, a bullish put vertical spread and a bearish put vertical spread. Those are both directional spreads, but some put spreads are neutral, neither bullish not bearish.

Some other possible put spreads include:

A calendar put spread: Buy a put with a longer expiration date, sell a put with a nearer expiration date at the same strike price.

A diagonal put spread: Buy a put with a longer expiration date, sell a put with a nearer date with a different strike price.

Every one of thes spreads mentioned so far can be "ratioed" by trading a different number of contracts in one leg than the other. For example, my HOV spread at

http://messages.yahoo.com/Business_%26_Finance/Investments/threadview?m=tm&bn=4686677%23optiontradestraderecommendations&tid=3318&mid=3318&tof=6&frt=1

is a ratioed vertical put spread because I sold three times as many puts as I bought.

A butterfly put spread: Buy an equal number of puts at two different stirke prices, sell twice as many puts at a strike price half way between the strike prices of the two long positions.

A condor put spread: Buy an equal number of puts at two different strike prices, sell an equal number of puts at strike prices 1/3 and 2/3 of the way between the strike prices of the two long positions.

An albatross put spread: Buy an equal number of puts at two different strike prices, sell an equal number of puts at strike prices 1/4 and 3/4 of the way between the strike prices of the two long positions.

All of the spreads mentioned so far can be reversed. To reverse it simply replace "buy" with "sell" and replace "sell" with "buy" in the original definition. So, for example, you could reverse a long albatross put spread to create a short albatross put spread where you sold the outer strikes and bought the inner strikes.

In case you come upon the term, a "backspread" is a spread in which more contracts are purchased than sold.

Any number of other put spreads are possible which do not have names, or have names that have been made up by a small group but the names have not been generally accepted by the trading community.