Vertical Spread – Monthly Paychecks From Wall Street

Posted on September 9, 2010
Filed Under Investment Bonds | Leave a Comment

A number of different techniques and strategies are available to option investors to help assist them in achieving consistent and reliable monthly income from the option market.

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.

The vertical spread trade can be built from either call options or also put options.

Following is an illustration of a bull put vertical spread…

Sell 5 RIMM 50 Call Purchase 5 RIMM 50 Call

This hypothetical vertical spread will profit if the stock XYZ stays where it is trading at (or in other words NOT go up) – or heads down. It is a bearish play.

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.

If the trader pacing this trade is correct in his prediction and ABC does in fact rise or stay where it is trading at, this position will be a winning trade and the premium that was collected when the trade was first put on will remain in the traders account as 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.

Comments

Leave a Reply