When option traders or investors engage in spread strategies, they often work with vertical spreads.
Any discrepancy is created when a person buys and sells options to buy on the same stock or buys and sells put options on the same stock.
A vertical or price gap derives its name from the vertical price movement. In this strategy of options, the exercise prices are different but the months are the same.
Vertical vs. Horizontal
A horizontal gap is when the exercise prices are the same, but the months are different. They are also called calendars. A vertical strategy is the opposite. The months are the same, but the exercise prices of the options are different.
The strategy behind this is to make money on the potential of strike price difference or premiums – if a premium gain has been realized. All spreads are reduced to the premium gain compared to the trading or exercise potential. Verticals can be credit or debit.
When a spread is created and the investor has lost money on premiums (more money has been spent for the purchase than for the sale), it 'sa Is a spread. Because money has been lost on options, the investor will lose money if options expire worthless (which is possible). The holder of a debit spread can only benefit from the widening or the exercise of the options. Enlargement means that premiums increase and contracts become valuable enough to be traded later. A vertical debit spread indicates to the merchant that these contracts must be traded or exercised for profit.
When a spread is established and the investor has earned money on the premium, it is a credit spread. The benefit lies here with the options expiring worthless and the person making the premium as the maximum gain. A vertical credit spread is a strategy that does not work if the options are exercised. Strike prices would be reversed – in terms of profit.
Buy 1 WEF of the month of October 60 at the price of 500 $
Short 1 WEF Oct 70 Call for $ 200
This is a vertical difference or price because the exercise prices are different. This is also a debit because premiums have resulted in a loss of $ 300. It's also a bullish spread. It is bullish as the trader needs a market increase in the hope that the options are exercised. The call call gives him the right to buy the title at age 60 and the short call involves the obligation to sell the title at age 70. This potential gain of 10 points on the stock is the reason why a person would create a vertical flow spread. If the options expire, the maximum loss would be $ 300.
Buy 1 GHF April 30 Call for $ 600
Short 1 GHF 20 Apr Call for $ 900
It is also a price or vertical spread, but it is a credit spread. It's also bearish. Strike prices are not attractive to this investor because they will lose 10 points on them – if exercised. The goal here is for the stock to go down and the vertical options to expire. Credit spreads are still bearish.
These and any gap strategies are more profitable when you use them with actions you know well. Knowing the range of trading and the price behavior of your stock can make them attractive candidates for options or vertical spreads.
More about trading options for stock purchases RIGHT HERE