Dear gsap,
a) On 13th, if nifty closes 3900 for example your 4000 put willbe approximately at 180 rupees and 3900 put willbe approximately at 120 rupees. So your gain in 4000 put willbe 36 rupees and your loss in 3800 put willbe 73 rupees and your net loss willbe 37 rupees.
b) On 20th, if nifty closes 3900 for example your 4000 put willbe approximately at 150 rupees and 3900 put willbe approximately at 70 rupees. So your gain in 4000 put willbe 6 rupees and your loss in 3800 put willbe 23 rupees and your net loss willbe 17 rupees.
Am I correct AW 10.
Thanks for answering to gsap's query.. I am assuming that premium that u have mentioned is correct for future dates..
While evaluating the real worth of such position, we need to focus on net premium at any time which is nothing but the difference of the premium of both legs..
a) the net premium on 13th will be - difference of 180 (for 4000 put) and 120 (for 3900 put)... So if u decide to squareoff the position - you will get net 60rs for this. i.e for investment of 47, you are getting back 60.
It is not loss but profit..
b) Again net premium will be net of 150 rs and 70rs. = 80 rs.
again for investment of 47,u are getting back 80rs. it is profit..
As long as market goes down, the premium of higher strike put will always be more then premium of lower strike put. We see it on friday and also in both the example above as given by murajichandra. (just chk out the option chain of nifty and observe the premium of PUTs of higher strike and lower strikes. You can see it yourself.
if market falls to say 3700.. real value /intrinsic value of your 4000 put will be 300rs at that time. and real value of your 3900 put will be worth 200 rs. At expiry day, time value becomes ZERO so as long as market remains below 3900, you get the complete difference of real value which is difference between two strikes.
Before expiry, time value will be added to intrinsic value.
Higher value put will always be deeper in-the-money and hence will carry higher premium then lower value puts. Common sense logic is that if mkt is at 3800, then 3900 put has higher probability of going out of money and expiring worthless compared to 4000 put. So obviously, 4000 put will carry higher premium.
In short, with this bear spread, you right (long option 4000 ) will always be worth more then you obligation (short option 3900) making u winner as long as market stays down..
Hope this helps.
Happy Trading.