Option Spread Strategies
  1. Option Spreads: Introduction
  2. Option Spreads: Selling And Buying To Form A Spread
  3. Option Spreads: Vertical Spreads
  4. Option Spreads: Debit Spreads Structure
  5. Option Spreads: Credit Spreads Structure
  6. Option Spreads: Horizontal Spreads
  7. Option Spreads: Diagonal Spreads
  8. Option Spreads: Tips And Things To Consider
  9. Options Spreads: Conclusion

Option Spreads: Introduction


By John Summa, CTA, PhD, Founder of OptionsNerd.com

Too often, new traders jump into the options game with little or no understanding of how options spreads can provide a better strategy design. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. With this in mind, we've put together the following options spread tutorial, which we hope will shorten the learning curve.

The majority of options traded on U.S. exchanges take the form of what are known as outrights (i.e. the purchase or sale of an option on its own). On the other hand, what the industry terms "complex trades" comprise just a small share of the total volume of trades. It is in this category that we find the "complex" trade known as an option spread.

Using an option spread involves combining two different option strikes as part of a limited risk strategy. While the basic idea is simple, the implications of certain spread constructions can get a bit more complicated.

This tutorial is designed to help you better understand option spreads, their risk profiles and conditions for best use. While the general concept of a spread is rather simple, the devil, as they say, is always in the details. This tutorial will teach you what option spreads are and when they should be used. You'll also learn how to assess the potential risk (measured in the form of the "Greeks" - Delta, Theta, Vega) involved with the different types of spreads used, depending on whether you are bearish, bullish or neutral.

So, before you jump into a trade you think you have figured out, read on to learn how a spread might better fit the situation and your market outlook. If you need a refresher course on the basics of options and option terminology before you delve any deeper, we suggest you check out our Options Basics tutorial.

Option Spreads: Selling And Buying To Form A Spread

  1. Option Spreads: Introduction
  2. Option Spreads: Selling And Buying To Form A Spread
  3. Option Spreads: Vertical Spreads
  4. Option Spreads: Debit Spreads Structure
  5. Option Spreads: Credit Spreads Structure
  6. Option Spreads: Horizontal Spreads
  7. Option Spreads: Diagonal Spreads
  8. Option Spreads: Tips And Things To Consider
  9. Options Spreads: Conclusion
RELATED TERMS
  1. Short Leg

    Any contract in an option spread in which an individual holds ...
  2. Long Leg

    The part of an option spread strategy that involves buying an ...
  3. Buy A Spread

    Option strategy that will be profitable if the underlying security ...
  4. Credit Spread Option

    A financial derivative contract that transfers credit risk from ...
  5. Spread Option

    A type of option that derives its value from the difference between ...
  6. Atlantic Spread

    An options trading strategy that involves purchasing both an ...
RELATED FAQS
  1. How do I set a strike price in an options spread?

    Find out more about option spread strategies, and how to set the strike prices for bull call spreads and bull put spreads ... Read Answer >>
  2. What's the difference between a credit spread and a debt spread?

    Learn about debit and credit option spread strategies, how these strategies are used, and the differences between debit spreads ... Read Answer >>
  3. What is spread hedging?

    Learn about one of the most common risk-management strategies options traders use, called spread hedging, to limit exposure ... Read Answer >>
  4. What is the average debt/equity ratio for the Internet sector?

    Learn about how debit option spreads work, including their maximum profit and loss, and understand how time decay impacts ... Read Answer >>
  5. What are some examples of financial spread betting?

    Learn how financial spread betting is done, and see examples of some of the ways that investors can use spread betting as ... Read Answer >>
  6. How do traders use debit spreads to protect against loss?

    Review an example of how a trader might use a debit spread to limit the maximum loss on an options transaction, limiting ... Read Answer >>

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