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


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

Related Articles
  1. Trading

    Option Spreads: Vertical Spreads

    By John Summa, CTA, PhD, Founder of OptionsNerd.comLimiting Risk with Long and Short Options Legs We have seen that a spread is simply the combination of two legs, one short and one long (but ...
  2. Trading

    Options Spreads: Conclusion

    By John Summa, CTA, PhD, Founder of OptionsNerd.comIf you plan to use options spreads, you will discover that they have some major advantages over outrights. In fact, the full power of options ...
  3. Investing

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  4. Trading

    S&P 500 Options On Futures: Profiting From Time-Value Decay

    Writing bull put credit spreads are not only limited in risk, but can profit from a wider range of market directions.
  5. Trading

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
  6. Trading

    Option Spreads: Credit Spreads Structure

    By John Summa, CTA, PhD, Founder of OptionsNerd.comNow that you have a basic idea of what an option spread looks and feels like (of course limited to our simple vertical bull call spread), let's ...
  7. Investing

    Options Basics: Introduction

    Nowadays, many investors' portfolios include investments such as mutual funds, stocks and bonds. But the variety of securities you have at your disposal does not end there. Another type of ...
  8. Trading

    Google Stock Too Expensive For You? Try Options

    Investing in Google (GOOG) generally requires you to pay the price of the share multiplied by the number of shares bought. An alternative using lesser capital involves using options.
  9. Markets

    Collecting Option Premium In The Grain Market

    Believe it or not, there are some great income-generating strategies that are lower in risk.
  10. Trading

    Getting Started In Forex Options

    Stocks are not the only securities underlying options. Learn how to use FOREX options for profit and hedging.
Trading Center