Vertical Spread – Monthly Paychecks From Wall Street
There are a number of various option spread strategies that option non directional investors can utilize to generate income from the stock market without having to ‘predict’ market direction.
For example there is the butterfly spread, the iron condor, the diagonal (an/or the double diagonal), and the calendar spread, the double calendar spread – and, the Vertical Spread, which is sometimes also referred to as the Credit Spread.
In actuality, the vertical spread can be discovered inside found many of the previously talked about strategies. It is a core foundational trade to each of their makeup. Take for instance the iron condor. This trade is constructed from two separate vertical spreads – a put credit spread and a call credit spread – each positioned above and below where the underlying stock is currently trading at.
It is also a basic building block of the butterfly spread. The top half of the butterfly spread is actually just a vertical spread – as is the bottom half. An iron butterfly trade is built from a put vertical spread and a call vertical spread.
These positions can be constructed using either call options as well as put options. These may have different names attached to them to help differentiate them – such as bull put spread, bear call spread, etc – however – they are all vertical spreads.
Following is an illustration of a bear call vertical spread on the imaginary stock XYZ…
Sell 5 RIMM 50 Call Purchase 5 RIMM 50 Call
The vertical spread in the example above is a bearish position. Our hypothetical trader who placed this trade believed that RIMM would be moving lower – or staying in it’s general vicinity on the chart.
Some might think that because we are using calls this should be a bullish position, however this is not the case since we are selling the option that is closer to money, hoping to capture the time premium in the event that the stock moves down.
As long as the outlook on this trade is correct and RIMM stays where it is at or heads downwards, this trade will ‘win’ and the initial credit received when the trade was first placed will become the profit.
Looking for step by step instructions on how to trade the Vertical Spread, then visit www.verticalspread.net to learn this strategy as well as the Credit Spread option strategy.
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