Introducing Options Strategy ? Vertical Spread

There are more than 20 options strategies can be applied, but one of my favorite is Vertical Spread. The meaning of vertical spread is that you purchase and sell options of the same type (same stock symbol) with same expiration date but with the different strike price.

In Vertical spread, you can choose to apply bull put spread, bear call spread, bull call spread and bear put spread. Bull put spread or bull call spread can be applied when you think that the stock is bullish, that's what the bull word imply. And if you think the market is bearish, use the otherwise strategies (bear call spread and bear put spread) which have the bear word in it.

When the option sold is more expensive than the options bought, there is a net credit, this strategy call vertical credit spread. Both Bull put spread and Bear call spread are credit spread. Therefore, without fail you have the money in your pocket immediately after the button click on screen.

The benefit of using Vertical Credit Spread is that you can limit your loss due to the spread. Take an example, if your spread difference is $5, your limiting lost will be $500 (every option contract = 100 stock, therefore multiply by 100). The smaller the spread, the better chance to win as you minimize your risk.

My preferred strategy is using 2.5 spread, for example, sell/buy a pair of options strike price of 25 and 22.5, the difference is the spread which is 2.5 in this example.

On the other hand, selling a spread is normally better than buying a spread. Becoming the seller makes you have the advantage of the time value of the options. As you know that when option price is decreasing when close to the expired date, like a water fall pattern, time is on your side.

For an example, if you are selling QQQQ strike price 45 and buying the strike price 43, you have 2 dollar spread. Selling $0.8 option of the strike price 45 and buying at $0.3 option at 43 strike price make you have the credit of $0.5. If QQQQ hovers above 45 until the expiry date, you earn the credit of $50 ($0.5 x 100) by letting both of the options becoming worthless.

Nevertheless, set the stop loss at the level of the sold option minus the credit earn, if you use the above example, the stop loss should be at 44.5. Never allow the stock price drop further than the stop loss target, if it does, buy back the sold leg and let the bought leg run.
If you really want to play safe, cut the loss and close the position when the stop loss is triggered.

Doesn?t it sounds too simple to be truth? Find out more from options trading Academy.

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