What it is
Two puts sold at a lower strike pay for most of one put bought at the money. Against the first sold put sits the bought put, which covers it. Against the second sits nothing, and that extra put sets the risk.
Priced here with the same volatility at every strike, the trade needs a small payment to open. Real put prices usually carry skew: puts below the money trade richer than this model charges, so the two sold puts bring in more and the trade often opens for a credit. Then a stock that rises costs you nothing.
What has to happen for it to make money
The stock has to slip toward the sold strike and stop there. The best result lands on the sold strike itself: the long put is then worth the whole five-dollar gap, while both short puts expire worthless. Below it, the uncovered put gives back a dollar a share for every further dollar of fall, and past the lower break-even the position is losing.
Unlike the call version, the loss has a floor. A stock cannot go below zero, so the worst case is known before you open it, and it is large. If the stock stays above $100, every put expires and you keep whatever the opening cost or paid. Falling volatility helps before expiry, since more options are sold than bought.
Once it is on
A drift down toward $95 is the outcome you wanted, and the moment to choose: bank it, or repurchase one short put, which leaves a plain put debit spread with nothing uncovered. Waiting is costlier than with calls, because falls tend to arrive faster than rallies and implied volatility jumps with them, which makes the sold puts dearer to repurchase.
What goes wrong
A crash instead of a slide. Right about the direction, wrong about the size: a drop well through $95 turns the best case into a loss that keeps growing until the stock reaches zero.
Margin and assignment. Your broker treats the uncovered put as a naked one, and its requirement climbs as the stock falls, while the position is already losing. If assigned, it hands you 100 shares at $95, so it suits only someone content to own them there.
Pros and cons
- Pro: little or nothing to open, and often a credit where puts carry skew.
- Pro: its biggest payoff comes from a fall to $95.
- Pro: a rally costs at most the opening debit.
- Con: a large loss in a crash, limited only by the stock reaching zero.
- Con: the uncovered put needs margin and can be assigned.
- Con: it pays for hitting a price, not for being right about the direction.
In Restrike
One put bought against two sold is an uneven pair, so the Log does not fold it into a spread: you see each leg on its own row, on the Portfolio too. Give both one strategy label and the scorecards treat them as one position. Restrike imports them read-only from your broker and never places a trade.