In time, many options traders come to realize that two-option orders together can reduce risk while increasing overall profit potential. The strategy itself is called a spread. When you buy an option while selling another one for the same asset on the same date, this creates a vertical. Vertical spread options are created by selling one option below the strike price you intend to buy at. Just keep in mind that the range created by your spread is what you can earn as your profit.
Vertical Spreads and Their Impact on Your Gains
Most investors rely on four-basic types of vertical spreads and options-order types. Though more combinations exist in personal strategies, you need to build your angle on what we’ve come to commonly know. For starters, call and put orders are the two foundations of options trading. A call is a buy order, making it bullish. A put order is a sell order, making it bearish. We time these order options by two, being that we can buy and sell a call while we can also buy and sell a put.
All four orders apply to spreads, but which strategy you use is based on market conditions. Spreads are unique because their strategy is singular, but you rely on two open orders to account for the sole strategy you have. The visuals and mathematics of a spread are created when one order, being the sell order, is stacked under the higher strike point, which is the buy order. Here is a closer look at the variants coming from the two, basic orders of vertical spreads:
The Bull Call
This call option anticipates rising prices and sets a future date granting the right but not obligation to buy. These spreads work best when they have identical expiration dates. Where you set the call strike dictates where you’ll choose your accompanying sell order.
The Bear Call
This bearish-call option invests into rising prices but will sell shares once a strike price is met as opposed to buy shares. This means that your opposing option in this strategy is a separate buy order. The difference between that buy and sell order is your profit target.
The Bull Put
Here is a credit spread that requires you to issue a buying-put option, which means you’ll end off with a negative position. You’ll only get out of the negative as the trade begins to work in your favor. The profits come from setting up a sell position to counter your buy request.
The Bear Put
The bearish-put option requires you to sell one option but as the act of buying at another strike price. However, what you buy is a bearish position for what is, being a put, a very bearish order.
Taking advantage of the market as it moves is about having strategies to quickly access. Be sure to study the above carefully; reference it when you’re in need of the right strategy.