Spread options, Mutual Funds and Mutual Fund Investing - Fidelity Investments
Any spread that is constructed using calls can be refered to as a call spread. Similarly, put spreads are spreads created using put options.
Option buyers can consider using spreads to reduce the net cost of entering a trade. Naked option sellers can use spreads spread options to lower margin requirements so as to free up buying power while simultaneously putting a cap on the maximum loss potential. They are categorized by the relationships between the strike price and expiration dates of the options involved.
Let us use the example of Class C share price of Alphabet, Inc. The Alphabet, Inc. Instead of just buying an out-of-the-money call option on Alphabet, Inc.
Vertical spreads are constructed using options of the same class, same underlying security, same expiration month, but at different strike prices.
Horizontal or calendar spreads are constructed using options of the same underlying security, same strike prices but with different expiration dates.
In practice, however, choosing a bull call spread instead of buying only the lower strike call is a subjective decision. Bull call spreads benefit from two factors, a rising stock price and time decay of the short option. A bull call spread is the strategy of choice when the forecast is for a gradual price rise to the strike price of the short call. Impact of stock price change A bull call spread rises in price as the stock price rises and declines as the stock price falls.
Diagonal spreads are created using options of the same underlying security but different strike prices and expiration dates. Conversely, a bear spread is a spread where favorable outcome is attained 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 spread options received when spread options 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.
How to Generate Consistent Income Trading Options - Income Trading
More Options Strategies Altogether, there are quite a number of options trading strategies available to the investor and many of them come with exotic names. Here in this website, we have tutorials covering all known strategies and we have classified them under bullish strategiesbearish strategies and neutral non-directional strategies.