Vertical Spread – Like Taking Candy From A Baby

Posted on September 1, 2010
Filed Under Futures And Options | Leave a Comment

The Vertical Spreadis one of the more popular strategies among option traders. Along with being one of the easier option trading strategies to understand, another reason newer option traders in particular gravitate to this strategy is that it can require very little time to manage it while it is on. Another way to put it, is that credit spread sellers don’t need to be glued to their computer screens all day watching every tick of the market in order to generate consistent income with this trade.

The vertical spread is a fundamental element to numerous other option spread strategies including the iron condor, the butterfly spread, the double diagonal and others. It if fairly common for beginning option traders to gravitate to this strategy soon after discovering options and once they have gotten their feet wet with the purchase of straight calls and puts, then covered calls, and debit spreads.

These trades are popular due to their high probability of winning. When placed and traded properly, it is possible for vertical spreads to provide the trader with consistent income month after month – without the trader having to be right about market direction. Basically, those who trade this strategy just need to be correct about one thing which is where the stock or index being traded will not go.

For example let’s say our trader is bearish on the stock XYZ. XYZ is trading at a recent high and our trader believes that the stock will not move any higher over the next 30 days. So, he sells a bear call spread – a call option vertical spread that benefits in a neutral to bearish scenario.

The only way this spread trade can lose money is if the stock winds up doing 1 out of 4 possible scenarios – giving our trader a three out of four likelihood of winning. If the stock moves down as our trader predicts he wins. If the stock stays stagnant and goes nowhere, he wins. In fact, even if the stock moves against our trader and heads upward he wins just so long as the underlying doesn’t move so far as to breach the spread sold. The only our trader loses is if the underlying moves far enough upwards passing the option strike price that was sold – which if it does, our trader could still salvage the position through appropriate management and adjustment methods

Looking for specific instructions on how to trade the vertical spread, then visit www.verticalspread.net to find the best tips and step by step details on trading this strategy and the credit spread for monthly income.

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