Hello - I’m looking at the breakeven price for a bear spread using puts. Why would we add the premium received for selling the put iwth the lower excercise price and subtract the premium paid? Shouldn’t it be the other way around?
A bear put spread is net debit i.e. one pays money upfront since premium for higher strike long put > premium for lower strike short put
For breakeven:
Higher strike - breakeven stock price = long put premium - short put premium
Rearranging the equation:
Breakeven stock price = Higher Strike + short put premium - long put premium
Thank you so much! I’m using Schweser and haven’t looked at the CFAI books yet and couldn’t figure that out. It seems so obviously now! I was looking at it from a cashflow perspective but didn’t take into condieration that of course the premium will be higher for the long put in this scenario. Thank you again!
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