A vertical spread is an options strategy that involves buying (selling) a call (put) and simultaneously selling (buying) another call (put) at a.
Table of contents
- Some more vertical spreads
- Credit or Debit Options Spreads? How Do You Choose?
- Are Vertical Spreads all they are Cracked up to be?
- Vertical Spread Overview
- Bear Vertical Spreads
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Some more vertical spreads
Derivatives market. Derivative finance. Forwards Futures. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative.
Credit or Debit Options Spreads? How Do You Choose?
Categories : Options finance Derivatives finance. Hidden categories: Wikipedia articles needing context from December All Wikipedia articles needing context Wikipedia introduction cleanup from December All pages needing cleanup. Namespaces Article Talk. My favorite aspect of selling vertical spreads is that I can be completely wrong on my assumption and still make a profit.
Most people are unaware of this advantage that vertical spreads offer. Stock traders can only take a long or short view on an underlying ETF, but options traders have much more flexibility in the way they invest and take on risk.
Are Vertical Spreads all they are Cracked up to be?
So what is a vertical credit spread anyway? A vertical credit spread is the combination of selling an option and buying an option at different strikes which lasts roughly 10 — 40 days. There are two types of vertical credit spreads, bull put credit spreads and bear call credit spreads. Here is an example of how I use credit spreads to bring in income on a monthly and sometimes weekly basis. I will use a bear call credit spread for this discussion.
Vertical Spread Overview
Fear is in the market. However, opportunities are plentiful with the VIX trading at 35 — especially those of us who use credit spreads for income. Remember, a credit spread is a type of options trade that creates income by selling options.
And in a bearish atmosphere, fear makes the volatility index rise. And, with increased volatility brings higher options premium. And higher options premium, means that options traders who sell options can bring in more income on a monthly basis. So, I sell credit spreads. So how can a bull put allow me to take advantage of this type of market, and specifically an ETF, that has declined this sharply?
- When to Trade Vertical Spreads.
- Vertical Spreads for Up and Down Markets.
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Well, knowing that the volatility had increased dramatically causing options premiums to go up, I should be able to create a trade that allows me to have a profit range of percent while creating a larger buffer than normal to be wrong. Sure, I could swing for the fences and go for an even bigger pay-day, but I prefer to use volatility to increase my margin of safety instead of my income. Think about that.
Most investors would go for the bigger piece of the pie, instead of going for the sure thing. But as they say, a bird in the hand is worth two in the bush. Take the sure thing every time.
Do not extend yourself. Keep it simple and small and you will grow rich reliably. Back to the trade. Basically, IWM could have moved 9.
Bear Vertical Spreads
This margin is the true power of options. The trade allowed IWM to move lower, sideways or even 9. So, selling and buying these two calls essentially gave me a high probability of success — because I am betting that IWM would not rise over 10 percent over the next 32 days.