What are Options Spreads?
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 with different strike prices or expiration dates. Refer our StrategyFinder tool to see real tradable strategies which also includes spreads.
Options spreads form the basic foundation of many options trading strategies. A spread position is entered by buying and selling an equal number of options of the same class on the same underlying security, commodity, or financial instrument, but with different strike prices, different expiration dates, or both. The three main classes of spreads are vertical spreads, horizontal spreads, and diagonal spreads. They are grouped by the relationships between the strike price and expiration dates of the options involved. Vertical spreads, also known as money spreads, are spreads involving options of the same underlying security, commodity, or financial instrument having the same expiration month, but with different strike prices.
Options spreads are options trading strategies that involve taking simultaneous opposing positions at different exercise prices or strike prices. Options pricing involves estimates regarding future volatility; options spreads are a useful tool for minimizing the risk from making incorrect estimates. The simplest of options spreads is the vertical. A vertical consists of one long option, and one short one. Both must have the same expiration date, but will have different strike, or exercise, prices. Depending on which strikes are bought and sold, a vertical can be either bearish or bullish. Selling (or buying) a lower priced put (or call) option while buying (or selling) a higher priced one is bullish; taken in reverse, the vertical will be bearish. Vertical options spreads have limited risk but have limited profit potential. Ratio spreads, or backspreads, are options spreads similar to verticals, except the number of options bought is not the same as the number of options sold. For exam
