There are two main types of vertical spreads. There is the vertical call spread and the vertical put spread. Each spread allows you to do two things. First, you can buy it, making you long the vertical spread. Second, you can sell it making you short the vertical spread. Both can be employed to take [...]
Construction of a vertical spread occurs with the purchase and sale of a call (put) in the same stock and in the same month. The only difference between the two options is the strike price. For example, an investor would construct a vertical spread by purchasing the IBM June 55-call while selling the June IBM [...]
During the life of a vertical call spread, the spread will trade between its minimum and maximum values (between 0 and the difference between the two strikes). In the case of a vertical call spread, the spread will trade closer to zero when the stock trades closer to or lower than the lower strike price. [...]
An investor must always keep in mind that vertical spreads have an intrinsic value. This means it is possible to consider them ‘in the money.’ If a vertical spread has an intrinsic value, it can also have an extrinsic value. Unlike maximum intrinsic values that equal the difference between the strikes at expiration, maximum extrinsic [...]
To get a firm grasp of volatility’s effect on vertical spreads, let us examine three spreads against different implied volatilities while keeping the stock price constant at 67.5. These are the 60 – 65, 65 – 70 and 70 – 75 call spreads.
In-the-Money Vertical Spreads
Looking at the in-the-money spread (June 60 – 65), we see [...]
Vertical spreads will trade between its minimum and maximum values – zero and the difference between the two strikes. In the case of a vertical call spread, the spread will trade closer to zero when the stock trades closer to or lower than the lower strike price. The spread will trade closer to maximum value [...]
Trading preparation demands you know how you are going to trade the market the next day before it opens. It means that you are mentally prepared to adjust your trading strategies intraday, and even go so far as to reverse trend after the market opens when necessary.Three basic steps to consider are:
First, analyze the [...]
Hey Joe! No matter how hard I try, I still find myself hesitating before a trade. Any comments about that?
There are any number of reasons why a trader hesitates before a trade. The main one is lack of planning. Without a plan, there is no degree of confidence a trade will be successful, it’s [...]
The recent stock market crisis (2008) not only rocked the financial system and the world economy but also the pockets of countless options traders all over the world. Options traders who used to profit in the years prior to this market crisis broke their bank as none of their options strategies seem to work in [...]
Options are contracts on an underlying trading instrument such as shares of stock, bonds, a commodity, a mortgage loan and many others. However, there are common features among all options. It does not matter if it is a share of stock or a mortgage loan; they all have certain things in common. [...]