Final answer:
The described options strategy is a put spread, which includes selling and buying put options with different exercise prices. There are two main types, the bull put spread and the bear put spread, which are used depending on the investor's market outlook for the underlying stock to minimize risk and maximize profit potential.
Step-by-step explanation:
The options strategy described where you sell put options and buy put options on the same stock with different exercise prices is known as a put spread. There are two types of put spreads: the bull put spread and the bear put spread. In the bull put spread, an investor will sell a put option at a higher strike price and buy a put at a lower strike price, both with the same expiration date.
This strategy is employed when the investor expects the stock to rise modestly or at least not fall beyond the lower strike price. On the other hand, in a bear put spread, an investor buys a put option at a higher strike price and sells a put option at a lower strike price, anticipating the stock to decline; the profit is maximized if the stock falls below the lower strike price.
The main objective of this strategy is to minimize risk and maximize profit potential. Costs are reduced by the premium received from selling the put option, which helps pay for the purchased put.
This strategy can be beneficial in a market with moderate volatility where a trader has a specific expectation for the stock price's direction moving towards expiration.