When share prices fall, the potential profit will be unlimited.
It is a spread strategy, because it consists of a Long and a Short position in the same time. It is also a vertical strategy, because the two positions have different strike prices.
The investor speculates on decreasing market prices. This strategy should be used when the trader is not totally sure about the decreasing direction of the market.
The strategy usually is a net debit investment, but credit version is also popular. The direction of the market is decreasing. When the share price is below the lower strike price Longthe position will be potentially unlimited profitmaking until the share price reaches zero.
The loss can be maximised when the share price is between the higher and the middle strike prices. Because of the extra component, there are both lower and Upper breakeven points.
The investment is medium-term. Then, there will be enough time for the underlying product to move the profitable direction and the time not to have a negative effect on the Long option.