What is a Vertical Spread?
Vertical spreads, a strategy done with either calls or puts, involve buying one option and selling another option of the same type and expiration, but a different strike. A “bull call” spread, for example, entails buying one call and selling a higher-strike, lower-priced call to offset some of the premium cost. This type of spread would be done for a debit. A “bear call” spread would entail selling the lower-strike call and buying a higher-strike call to hedge the risk. This would produce a credit in your account; cash will be held as a margin for the position. Debit vertical spreads (bull call and “bear put” spreads) profit from a directional move. The position will succeed if the stock has moved past the bought strike plus the debit paid. For a full profit, the underlying needs to move beyond the sold strike by expiration. For example, if XYZ call spread is purchased, buying the 25 call and selling the 30 call for a debit of $2, then the full profit will come with the underlying anyw
Vertical spreads are just about any type of investment strategy that involves the simultaneous sale and purchase of options with specific common features. In general, both the transactions will include stock options that are of the same class and expiration date. However, the option sold and the option purchased do not have to carry the same strike price. A vertical spread can involve any options that are of the same type. That is, the option strategy can be based on activity including two puts or two calls. For instance, an investor may choose to purchase a call at a rate of a $100 US Dollars in United States currency, while at the same time selling a call for a rate of $110 (USD). As long as the options strategy includes the purchase and sell of stocks of the same class and with the same expiration date, the overall transaction can be properly referred to as a vertical spread. The obvious advantage of a vertical spread is that the investor can make money from the process. When a put
Types of Vertical Spreads A spread by definition, is when you sell one option and you buy another option that is correlated to the one you sold. This way if one loses value, then the other gains value and vice versa. This reduces the volatility and is in many ways much safer than purchasing a put or call alone. The way you make money with spreads is when one side of the spread gains more than the other side loses. The Debit Spread There are two types of vertical spreads, a debit spread and a credit spread. With a debit spread you will incur a debit when you place the trade. It involves purchasing an at the money option and selling an out of the money option. Let’s take a look at the exchange traded fund (EFT) on the Nasdaq (QQQQ) as an example: Let’s say that it’s the beginning of February and we are Bearish on QQQQ, so we decide to purchase the June At The Money Puts. The ETF is trading at $30.00 so we purchase the $30.00 June Put for $2.80. We then sell the June $20 Put for .45 givin
