![]() The long option will likely drop in value. Stock doesn’t rise quickly enough, or the stock is below the breakeven point as expiration nears.Ī drop in implied volatility and time decay could deflate the option premiums while the trade is on. ![]() A simultaneous rise in implied volatility could help, too, but the rise in the short option would somewhat offset the rise in the long option. Stock moves higher immediately, resulting in a profit. There’s one breakeven point (at expiration) at the long strike plus the debit paid (50 +$3 = $53 breakeven) Net cost (debit) of trade (In this example, $3) Limited to distance between strikes minus cost of trade ($5 wide spread - $3 net cost = $2 max profit) Net cost = $3 (x100 = $300 per spread)Ĭost of long call, less premium received for short call (In this example, $3) Long Call + short higher strike call in the same expirationīuy August 50 Call for $5 and sell Aug 55 Call for $2. Low implied volatility, bullish stock, sector, and market You think a stock is going up within a certain time frame Let’s look at these two spreads in detail: CALL DEBIT SPREAD (other names: long call spread or long call vertical) This spread can still profit if the stock moves the right direction, but it’s more insulated from an implied volatility (aka “IV”) drop than just a long option by itself. The max value a spread can reach is the difference between the strikes. Together, the net price of the two options equals the total cost of the spread. To build a debit spread (call or put) start with a long option and add in a short option that’s further out of the money.īullish debit spreads use calls while bearish debit spreads use puts, and options are traded on a 1:1 ratio in the same expiration. If you’re bullish or bearish on a stock, but buying calls and puts gets too expensive, a debit spread can help. First up: Debit spreads (aka long vertical spreads) While debit and credit spreads are for speculating on direction (up or down), iron condors are for speculating on direction-less markets that are moving sideways. The most basic three spreads are usually the most commonly used-debit spreads, credit spreads, and iron condors (we promise, this is a strategy, not a comic book character), and are worth knowing since they serve as the building blocks of many other spreads. They all have the same expiration date, and each will contain a combination of both long and short options. The most common spreads which we’ll discuss in this article are debit spreads, credit spreads, and iron condors. ![]() Which is just a long-winded way of saying spreads allow you a level of versatility, strategy, and in many ways, let you be creative. They’re called “spreads'' because the options in each strategy can be spread across price, time, or volatility, or all three through various combinations of long and/or short options, different strike prices, and the same (or even different) expiration periods. Each option in the spread has a job, and together, the goal is to profit, as a package. You can piece them together in different shapes and sizes to build something unique. They are generally risk-defined, and can be created and combined in various arrangements. What’s a spread?Ī spread is a combination of two or more different options that include both long and short positions, or “legs.” Spreads can be bought for a debit or sold for a credit. What if your charting skills have identified an area where the stock might move sideways and you’re looking to profit from a sideways market? Or perhaps you want to buy a call or put but you wish it wasn’t so expensive. Do you wish you could take a directional position without buying options premium, and thus put time decay in your favor? Maybe you think volatility is high relative to its historical average and you want to sell it. For many options traders, the journey ends there, and that’s ok.īut for others, there’s an entire world of possibilities to explore with options. Buying calls and puts are pure plays on the direction of the underlying stock. They’re more straightforward, relatively cheap, and usually the easiest strategy to understand. It makes sense that you started there since they’re the most commonly traded option strategies. If you’re reading this, you probably know a thing or two about single options strategies like buying calls and puts. Multiple-option strategies: How to spread ![]()
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