Critique of put spreads versus outright long puts

Two rival procedures

A long-put is a single-leg put purchase used as a directional or hedge signal. Full premium is at risk, but only one quoted spread is crossed per side.

An option-spread, in this archive, is a two-leg debit put structure. It buys one strike and sells a lower strike so net premium and defined risk fall, at the cost of a second bid-ask crossing on both entry and exit.

A bear put spread is built by buying one put and selling another with a lower strike. Exiting it requires selling the higher-strike put and buying back the lower-strike put.

Two legs, two crossings

Because that option-spread trades two contracts, a short-horizon trader incurs more commission and twice the bid-ask drag than an outright long put.

Slippage is cash lost solely from buying the offer and selling the bid, independent of the subsequent market move.

Holding period and richer premiums

For holdings longer than 60 days, or on high-priced or high-volatility underlyings with richer premiums, the two-leg spread is described as often lowering net debit and overall risk relative to an outright purchase.

The archive does not treat the cheaper-looking payoff sketch as the ranking rule. The holding period and the premium level are the conditions it names for when the second leg is described as reducing net debit and overall risk.

Assignment on stock overlays and cash indexes

Assignment is the short-option writer's obligation to deliver the underlying after a long holder exercises. The broker typically effects delivery and issues a notice.

Owning shares and selling calls against them creates a covered-call overlay. Income from the short call lowers the net holding cost, and upside is capped because a move through the short strike makes assignment of the call likely. If the stock finishes above the short-call strike at expiration, assignment is probable. Closing the short call before expiration is the action described for avoiding it.

Once assignment occurs, the broker delivers the shares and sends an assignment notice, so the writer does not need a separate delivery step. Exercise and assignment also typically carry a broker commission.

The 500-stock cash index is described as typically less volatile than the 100-stock cash index because it includes more constituents. Options on the 500-stock index settle european-style and can be exercised only at expiration. The original 100-stock index options settle american-style and can be exercised at any time. A later european-style twin of the 100-stock contract was listed to remove early-assignment risk on the cash index.

European-style means exercise and assignment are allowed only at expiration, which removes early-assignment risk on cash-settled index options. American-style means exercise and assignment are allowed at any time before expiration, which keeps early-assignment risk in force.