Credit put option

CFA Level III
#1

CFAI Volume 4 p 26-27 Example 14 discusses the credit put option. If I enter into a credit put option, I want to protect myself from widening credit spread/declining underlying value - correct? Example 3 seems to suggest the opposite… I may be completely messed up (at least that’s how I’m feeling right about now). Someone please show me the error of my ways… DH

#2

I believe credit put option would mean you are expecting shrinking of the spread. For a call option, you are expecting an increase in the spread. Take a look at the explanation of a credit spread in the previous page. They have given the formula for the credit call option.

#3

if you are afraid of your bond, they say you buy a binary credit put option (underlying is the price of the bond, not the spread, and is a put because you want to capture the downside of the bond) or a credit spread call option (underlying is spread, and is a call because you want to capture the upside of the spread)

#4

Thanks hala_madrid and CC. I was looking at the underlying as the bond (not the spread as in the call example) and found the two examples confusing.

#5

I agree with CC. The payoff of a credit put option should be: NP*(strike spread-current spread) So if you think spread will decrease, you should buy a put option.

#6

nailittwice Wrote: ------------------------------------------------------- > I agree with CC. The payoff of a credit put option > should be: > NP*(strike spread-current spread) > > So if you think spread will decrease, you should > buy a put option. NP* multiplier *(strike spread-current spread)