To Buy The Spread

What do you mean ‘by means of the spread’?

Buying the spread is an options strategy involving buying a call option with one strike and selling an option with a different strike, but all with the same underlying asset and expiration date. The purchased option has a higher price than the sold option. Both options can be calls or they can be put.

This is also called a long spread or a debit spread because, as with the purchase of any asset, the trader must pay in advance to start the trade.

A long call spread is a bullish strategy. Long put spread bearish strategy.

The opposite transaction is called selling the spread, the short spreads or credit spreads. Thus, the short bear call spread and short put spread bullish. As a result, net credit to the account at the beginning of the trade.

Breaking down the ‘buy a spread’

Options spreads such as these are called vertical spreads because the only difference between bought and sold options strike prices. The name is derived from the circuit parameters of the display, listing the options vertically strike prices.

Bull call spread involves buying a call option at a particular strike price and selling or writing the same number of calls of the same asset and the date of expiration but at a higher strike price. Bullish call spread is used when it is expected a moderate increase in the price of the underlying asset.

The bear put spread involves buying put options at a certain strike price and selling or writing the same number of puts on the same asset and the same expiration date but a lower strike price. Bearish put spread is used when it is expected a moderate decrease in the prices of the underlying asset.

In short, the trader buys the option and sells of the option, which creates a net debit in the account. Maximum profit is attained if the underlying asset closes at the strike of the original option. It is equal to the difference between strikes minus net debit paid to initiate the trade.

The advantages of buying apply

The main advantage of long spreads that the net risk per trade is reduced. Cheap selling options helps offset the costs of purchasing the more expensive option. Thus, the amount of capital investment is lower than buying one option at once. And it carries much less risk than trading the underlying stock or security, as the risk is limited to the net cost of the spread.

If the trader believes the underlying stock or securities will move in a limited quantity between the transaction date and the expiration date, the long spread can be the perfect game. However, if the underlying action or movement of security by a greater amount, then the trader gets the opportunity of acquiring additional profit. It is a compromise between risk and yield, which is attractive to many traders.

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