Section 4: Using option spreads
The magic of options come when you start combining them to reflect a net position that can be optimized for whatever conditions you expect in the future. If you expect the market to make a large move but are unsure if it will be up or down you could buy a put and call simultaneously with the same strike price. If you thought the market was not going to move you could sell the same position. If you think the market will go up, but not too much, you may want to buy a bull call spread and so on. For every detailed opinion of the market there is a spread that can be built to accommodate it.
Here are an example of a few more common spreads, most brokers will allow you to submit multiple option orders as a spread in order to limit the price you pay for the ultimate position while insuring that you are filled on all the legs.
Calendar Spread
The purchase and sale of options of the same class with the same strike but different expiration dates.
Vertical Spread
The purchase and sale of options of the same class with the same expiration dates but different strikes.
Bull Call Spread
Buy the call with the lower strike and sell the call with the higher strike price. The net result is a debit spread.
Bull Put Spread
Buy the put with the lower strike and sell the put with the higher strike price. The net result is is a credit spread.
Bear Put Spread
Sell the put with the lower strike and buy the one with the higher strike price. The net result is a credit spread.
Bear Call Spread
Sell the call with the lower strike and buy the call with the higher strike price. The net result is a credit spread.
Straddles
Purchase or sale of both a put and a call on the same underlying contract with the same expiration and strike.
Long Straddle
Purchase both a put and a call. Done when the trader expects a large move but is not sure on the direction.
Short Straddle
Sell both a put and a call. Done when the trader expects little or no movement in the futures contract.
Strangles
Purchase or sale of both a put and a call on the same underlying contract with the same expiration but different strike prices.
Long Strangle
Purchase both a put and a call. Done when the trader expects a large move but is not sure on the direction.
Short Strangle
Purchase or sale of both a put and a call on the same underlying contract with the same expiration but different strike prices.
Futures-Option-Trading.com
1: Futures option trading basics
2: How to price futures options
3: Understanding the Greeks
4: Using option spreads
5: Synthetic options and futures
6: Strategies
7: Tips for buying and selling
8: Risk Disclosures for options
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