FRM Part I · FRM Exam Part I · Trading Strategies
Which view of the underlying and which premium outcome best describes a bear put spread?
A bear put spread reflects a moderately bearish view and requires a net premium payment. The trader buys the higher-strike put, which costs more, and sells the lower-strike put, so the initial cash flow is a debit, with profit capped at the strike difference minus the debit.
- AModerately bearish view; net premium paidCorrect
- BStrongly bullish view; net premium received
- CModerately bearish view; net premium received
- DNeutral view with low volatility; net premium paid
Explanation
A bear put spread buys the higher-strike put and sells the lower-strike put. The higher-strike put costs more, so there is a net debit. Profit is limited but rises as the stock falls toward the lower strike, reflecting a moderately bearish view.
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