Description:
This is a horizontal spread consisting of a long position in a close to ATM put option with TTM T′ and a short position in another put option with the same strike price K but shorter TTM T < T′. This is a net debit trade. The trader’s outlook is neutral to bearish. At the expiration of the short put option (t = T ), the best case scenario is if the stock price is right at the strike price (ST = K).
At t = T let V be the value of the long put option (expiring at t = T′) assuming ST = K
If at the expiration of the short put option the stock price K ≤ ST ≤ Sstop−loss, where Sstop−loss is the stop-loss price above which the trader would unwind the entire position, then the trader can write another put option with the strike price K and TTM T1 < T′. While maintaining the long position in the put option with TTM T′, the trader can generate income by periodically selling put options with shorter maturities. In this regard, this strategy resembles the covered put strategy.
