Spread Options Strategies
Spread strategies usually combine multiple options to optimize for various scenarios. They can be use to protect against volatility or reduce the cost of entering a trade amongst other things. in this article we will look at a few typical scenarios.
The spreads usually involves selling and buying call or puts options at different strike prices to achieve the desired effect. You can see that depending on the options type bought and sold, and the strike prices for each leg of the strategy, there are quite a combinations.
In this article, we will try to demistify the most common ones and describe what they are good for.
https://docs.google.com/spreadsheets/d/1umvU6wDCELMuB498zydvdKqvDJqANZeoqmWfJLF_wUM/edit#gid=0
Credit Spread
A credit in the accounting sense means that there is a decrease in assets or an increase in liability.
Bull call spread: Buy an option with strike above stock price, sell option with strike higher than options bought. this results in a debit to the account.
For example: if stock price is 50$: Buy call @ 55 $ and sell call @ 60$.
Bear put spreads: Buy a put with a strike price lower than current price. Sell a second contract with the strike price lower than the previous. For example. if stock price is 50$: Buy put @ 45$ and sell put @ 40$.
Credits spreads are often used by investors of the theta gang since they get a net profit, with the hope that the option sold will expire worthless.
Debit Spread
Also known as net debit spread. in accounting sense, this is the opposite of a credit. It means in a increase in assets or a decrease in liability.
Counterintuitively, at leat if you are not familiar with accounting, A debit spread is when the total value collected from the options sold, is lower than the amount expensed to buy the options.
Bull Call Spread
This strategy benefits from a stock limited price increase. It limits the losses of owning the stock, but also limits the gains