Option spreads is one such strategy. It means, taking position in two or more options of the
same type (call or put) on the same underlying.
Types of Spreads:
• Vertical Spreads
• Horizontal Spreads or Time Spreads
• Diagonal Spreads
same type (call or put) on the same underlying.
Types of Spreads:
• Vertical Spreads
• Horizontal Spreads or Time Spreads
• Diagonal Spreads
A) Vertical Spreads
It is an option spread, where you may buy a call with another strike price with same expiration period. Here you are using Different strike prices with same expirations.
It is an option spread, where you may buy a call with another strike price with same expiration period. Here you are using Different strike prices with same expirations.
Bullish Vertical Spreads :
Here you buy lower strike price options and sell higher strike price options.
Here you buy lower strike price options and sell higher strike price options.
Bullish vertical Spreads using calls.
Buy lower strike price calls and sell higher strike price calls. We are buying lower strike price calls, which are costlier, i.e. premiums are higher and we are selling higher strike price
calls, where premium are lower.
Hence in this spread there would be net outflows of premium or net debit. This is a net debit strategy. Net debit and credit is the terms used in options, just to define that the net premium in a spread is payable or receivable.
Buy lower strike price calls and sell higher strike price calls. We are buying lower strike price calls, which are costlier, i.e. premiums are higher and we are selling higher strike price
calls, where premium are lower.
Hence in this spread there would be net outflows of premium or net debit. This is a net debit strategy. Net debit and credit is the terms used in options, just to define that the net premium in a spread is payable or receivable.
Bullish Vertical Spread using puts:
- Buy lower strike puts
- Sell higher strike puts.
Bearish Vertical Spreads :
Here you buy high strike options and sell low strike options.
B) Horizontal or Time spreads
Horizontal or time spread is established by taking two opposite positions in two call (or put) options, at the same strike price but with different expiry months.
In this strategy, outlook is stable. Trader expects to gain from the declining time value of options. The concept of time value of options declining at an accelerated pace with approaching expiry, works for the tracker.
C) Diagonal Spreads
Here two legs of the spread, have different strike prices and also different expiry months. This combines features of both vertical and horizontal spreads.
This spread may be used to create a bullish spread or a bearish spread.
Bullish diagonal spread using calls:
Without different expiry periods, this is exactly a vertical bullish spread. Different expiry periods add a dimension of horizontal spread.
Types Of Options Spreads
- Straddles
- Strangles
- Ratio Call writing
- Butterfly Spreads
- Strip Strategy