Securities Trader Representative (Series 57) Practice Exam

What is the name of the option position created by buying 5 EW April 75 puts and selling 5 EW April 80 puts?

1. Horizontal put spread

2. Bearish put spread

3. Bullish put spread

4. Neutral put spread

The correct answer is: Bullish put spread

The option position described involves buying 5 EW April 75 puts while simultaneously selling 5 EW April 80 puts. This transaction creates a scenario where the trader benefits from a decrease in the underlying asset's price, but the specifics of the execution clarify the nature of the spread. This situation is known as a bearish put spread. The purchase of the 75 puts allows the trader to have the right to sell the underlying asset at that price, while the sale of the 80 puts obligates the trader to sell should the market price fall below $80, effectively capturing the premium from the sold puts. The strategy is designed to profit from a decline in the asset's price while limiting potential losses. In this strategy, the maximum gain occurs if the underlying price is at or below $75 at expiration, maximizing the spread between the long position in the lower strike puts and the short position in the higher-strike puts. Hence, the primary intent is to take advantage of the expected declining market, which aligns directly with the definition of a bearish put spread.