Option Spreads
A
strategy that aims to reduce risk while benefiting from price movements
from a two part position - the sale and purchase of related options.
Spreads have a marked interest in either strike price, expiration,
or both.
Organized
by strike price and expiration, spreads may be considered
one of three types:
vertical
spread which
involve different strike prices for the same underlying
security at the same
expiry.
horizontal
spread (the same
as calendar spread) -
meaning these are time based spreads that have the same strike
prices for the same underlying security but at different expirations.
diagonal spreads - a spread for the same underlying
security having different expirations and strike prices. Made of
the vertical and horizontal spread.
Bull
Spread - The strategy of the bull spread (or Call
Spread) is
intended to benefit from the
increase in price level of the underlying security. Buying
low strike calls and selling high.
Bear Spread - The bear spread
strategy (or Put
Spread) profits when there
is a lowering in the price of the security that underlies. Basically,
buying high strike puts and selling low.
Ratio Spread - Is a strategy of buying options
and selling a different quantity of
options at different strike prices but at the same expiration.
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