Options strategy

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Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but option trades wiki different strike prices or expiration dates. Option trades wiki three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread. They are grouped by the relationships between the strike price and expiration dates of the options involved.

Vertical spreadsor money spreads, are spreads involving options of the same underlying security, same expiration month, but at different strike prices. Horizontal, calendar spreadsor time spreads are created using options of the same underlying security, same strike prices but with different expiration dates. Diagonal spreads are constructed using options option trades wiki the same underlying security but different strike prices and expiration dates.

They are called diagonal spreads because they are a combination of vertical and horizontal spreads. Any spread that is constructed using calls can be referred to as a call option trades wiki, while a put spread is constructed using put options.

If a spread is designed to profit from a rise in the price of the underlying security, it is a bull spread. A bear spread is a spread where favorable outcome is obtained when the price of the underlying security goes down.

If the premiums of the options sold is higher than the premiums of the options purchased, then a net credit is received when entering the spread.

If the opposite is true, then a debit is taken. Spreads that are entered on a debit are known as debit spreads while those entered on a credit are known as credit spreads. There are also spreads in which unequal number of option trades wiki are simultaneously purchased and written.

When more options are written than purchased, it is a ratio spread. When more options are purchased than written, it is a backspread. Many options strategies are built around spreads and combinations of spreads. For example, a bull put spread is basically a bull spread that is also a credit spread while the iron butterfly can be broken down into a combination of a bull put spread and a bear call spread.

A box spread consists of a bull call spread and a bear put option trades wiki. The calls and puts have the same expiration date. The resulting portfolio is delta neutral.

For example, a January box consists option trades wiki. A box spread position has a constant payoff at exercise equal to the difference in strike values. Thus, the box example above is worth 10 at exercise. For this reason, a box is option trades wiki considered a "pure interest rate play" option trades wiki buying one basically constitutes lending some money to the counterparty until exercise.

The net volatility of an option spread trade is the volatility level such that the theoretical value of the spread trade is equal to the spread's market price. In practice, it can be considered the implied volatility of the option spread. From Wikipedia, the free encyclopedia. For the American football offensive scheme, see Spread offense. This option trades wiki needs additional citations for verification. Please help improve this article by adding citations to reliable sources.

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In finance , a credit spread , or net credit spread is an options strategy that involves a purchase of one option and a sale of another option in the same class and expiration but different strike prices. It is designed to make a profit when the spreads between the two options narrows. Investors receive a net credit for entering the position, and want the spreads to narrow or expire for profit. In contrast, an investor would have to pay to enter a debit spread.

In this context, "to narrow" means that the option sold by the trader is in the money at expiration, but by an amount that is less than the net premium received, in which event the trade is profitable but by less than the maximum that would be realized if both options of the spread were to expire worthless.

Bullish options strategies are employed when the options trader expects the underlying stock price to move upwards. It is necessary to assess how high the stock price can go and the time frame in which the rally will occur in order to select the optimum trading strategy. Moderately bullish options traders usually set a target price for the bull run and utilize bull spreads to reduce cost. It does not reduce risk because the options can still expire worthless. While maximum profit is capped for these strategies, they usually cost less to employ for a given nominal amount of exposure.

The bull call spread and the bull put spread are common examples of moderately bullish strategies. Bearish options strategies are employed when the options trader expects the underlying stock price to move downwards. It is necessary to assess how low the stock price can go and the time frame in which the decline will happen in order to select the optimum trading strategy. Moderately bearish' options traders usually set a target price for the expected decline and utilize bear spreads to reduce cost.

While maximum profit is capped for these strategies, they usually cost less to employ. The bear call spread and the bear put spread are common examples of moderately bearish strategies. To find the credit spread breakeven points for call spreads, the net premium is added to the lower strike price. For put spreads, the net premium is subtracted from the higher strike price to breakeven.

The maximum gain and loss potential are the same for call and put spreads. For example, one uses a credit spread as a conservative strategy designed to earn modest income for the trader while also having losses strictly limited. This is also a vertical spread. If the trader is bearish expects prices to fall , you use a bearish call spread.

It's named this way because you're buying and selling a call and taking a bearish position. If the final price was between 36 and 37 your losses would be less or your gains would be less.

Traders often using charting software and technical analysis to find stocks that are overbought have run up in price and are likely to sell off a bit, or stagnate as candidates for bearish call spreads. If the trader is bullish, you set up a bullish credit spread using puts. Look at the following example.

Traders often scan price charts and use technical analysis to find stocks that are oversold have fallen sharply in price and perhaps due for a rebound as candidates for bullish put spreads. From Wikipedia, the free encyclopedia. This article may be too technical for most readers to understand. Please help improve it to make it understandable to non-experts , without removing the technical details. February Learn how and when to remove this template message.

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