This strategy requires the investor to buy an in-the-money (higher) Put Option and sell an out-of-the-money (lower) Put Option on the same stock with the same expiration date.
This strategy creates a net debit for the investor. The net effect of the strategy is to bring down the cost and raise the breakeven on buying a Put (long Put).
The strategy needs a bearish outlook since the investor will make money only when the stock price/index falls. The bought Puts will have the effect of capping the investor’s downside. While the Puts sold will reduce the investor's costs, risk, and raise the breakeven point (from a Put exercise point of view).
If the stock price closes below the out-of-the-money (lower) Put Option strike price on the expiration date, then the investor reaches maximum profits. If the stock price increases above the in-the-money (higher) Put Option strike price at the expiration date, then the investor has a maximum loss potential of the net debit.
