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
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.
TradingThere are ways to control risks, reduce losses and increase the likelihood of success in your portfolio. Find out how spreads can help.
TradingWriting bull put credit spreads are not only limited in risk, but can profit from a wider range of market directions.
TradingBull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
TradingA thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
TradingFutures investors flock to spreads because they hold true to fundamental market factors.
TradingThis trading strategy is an excellent limited-risk strategy that can be used with equity as well as commodity and futures options.
TradingKnowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading.