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SUMMARY OF FOUR BASIC SPREAD TRADES:
Bull Put Credit Spread ( aka Selling Vertical
Puts)
The stock has to close above the higher strike price on expiration day
for the maximum gain. ( Both options expire worthless )
Leg One: buy to open long put ( lower strike price )
Leg Two: sell to open short put ( higher strike price )
Net Credit = $ sell to open - $ buy to open.
Max. Gain = Net Credit.
Max. Loss = Difference between strike prices – Net Credit.
Break Even = Higher Strike Price – Net Credit.
Main Points: This is a bullish strategy. We should look
for up trending stock with strong support. Conservatively, the short put
position should be below the support level.
Bear Call
Credit Spread ( aka Selling Vertical Calls)
The stock has to close below the lower strike price on expiration
day for the maximum gain. ( Both options expire worthless )
Leg One: buy to open long call ( higher strike price )
Leg Two: sell to open short call ( lower strike price )
Net Credit = $ sell to open - $ buy to open.
Max. Gain = Net Credit.
Max. Loss = Difference between strike prices – Net Credit.
Break Even = Lower Strike Price + Net Credit.
Main Points: This is a bearish strategy. We should look
for down trending stock with strong resistance. Conservatively, the short
call position should be above the resistance level.
Bull Call Debit Spread ( aka Buying Vertical
Calls )
The stock has to close above the higher strike price on expiration
day for the maximum gain. (Both options exercised.)
Leg one: buy to open long call ( lower strike price )
Leg two: sell to open short call ( higher strike price )
Net Debit = $ buy to open - $ sell to open.
Max. Gain = Difference between strike prices – Net Debit.
Max. Loss = Net Debit.
Break Even = Lower Strike Price + Net Debit.
Main points: This is a bullish strategy. We should look
for up trending stock with strong support. Conservatively, the short call
position should be below the support level.
Bear Put Debit Spread ( aka Buying Vertical
Puts )
The stock has to close below the lower strike price on expiration
day for the maximum gain. ( Both options exercised
or expired in-the-money.)
Leg one: buy to open long put ( higher strike price )
Leg two: sell to open short put ( lower strike price )
Net Debit = $ buy to open -$ sell to open.
Max. Gain = Difference between strike prices – Net Debit.
Max Loss = Net Debit.
Break Even = Higher Strike Price – Net Debit.
Main Points: This is a bearish strategy. We should look
for down trending stock with strong resistance. Conservatively, the short
put position should be above the resistance level.
Buying and selling vertical calls and puts are important for
further understanding of more advanced option strategies. In my opinion,
the more advanced option strategies are either the variation or the
combination of buying and selling vertical calls and puts. We will discuss
those strategies in the subsequent lessons.
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