Vertical Spread - Who's Your Daddy Now, Wall Street?
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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.
Several examples include: the calendar spread, the iron condor spread, the butterfly spread, the double diagonal, and the Credit Spread - also know and referred to as the Vertical 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.
Also take a look at the butterfly. This strategy is comprised of verticals as well. One in the upper half of the position and one in the lower half. Also the iron butterfly is made up of two credit - or vertical spreads. A put vertical and a call vertical - both sold at a credit.
Vertical spreads can be used with both put and call options. A bearish vertical is called a bear call spread, which is placed using calls above where the underlying vehicle is currently trading at. A bullish play is called a bull put spread, which is a vertical spread using puts placed below where the stock or index being used is trading at.
Here is a hypothetical example of a bear call vertical spread...
Sell 5 RIMM 50 Call Purchase 5 RIMM 50 Call
Again, this vertical spread is a bullish position - where the opinion of the option seller is that ABC will be moving higher over the shorter term, or staying put in it's general area on the price chart.
This position is called a bull put spread due to the fact that even though the position is created using put options, it is being placed in such a way that generates a profit if and when the stock being used moves bullishly.
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.
Article Source: Articlelogy.com
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