Some more vertical spreads

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What are the risks in selling put vertical spreads?

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The monetary risk in selling put vertical spreads is limited.

The most you can lose on a debit vertical spread is the amount you paid, the most you can lose on a credit vertical spread is the difference between the two strikes – the credit you received.

Below is a graph of return vs. the underlying stock price for a sold put vertical spread, also called a short or bull put spread.

As you can see both the risk and reward are defined.

Some advantages of vertical spreads:

  • They limit maximum risk
  • They can lower net premium paid

I use vertical spreads all the time when I am predicting a movement but wa.

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Key Concepts Options Strategies

Vertical Spread

A long call vertical spread is a bullish, defined risk strategy made up of a long and short call at different strikes in the same expiration.

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Directional Assumption: Bullish

Setup:
– Buy ITM Call
– Sell OTM Call

Ideal Implied Volatility Environment: Low

Max Profit: Distance Between Call Strikes – Net Debit Paid

How to Calculate Breakeven(s): Long Call Strike + Net Debit Paid

Long Put Vertical Spread

A long put vertical spread is a bearish, defined risk strategy made up of a long and short put at different strikes in the same expiration.

Directional Assumption: Bearish

Setup:
– Buy ITM Put
– Sell OTM Put

Ideal Implied Volatility Environment: Low

Max Profit: Distance Between Put Strikes – Net Debit Paid

How to Calculate Breakeven(s): Long Put Strike – Debit Paid

Short Call Vertical Spread

A short call vertical spread is a bearish, defined risk strategy made up of a long and short call at different strikes in the same expiration.

Directional Assumption: Bearish

Setup:
– Sell OTM Call (closer to ATM)
– Buy OTM Call (further away from ATM)

Ideal Implied Volatility Environment: High

Max Profit: Credit received from opening trade

How to Calculate Breakeven(s): Short call strike + credit received

Short Put Vertical Spread

A short put vertical spread is a bullish, defined risk strategy made up of a long and short put at different strikes in the same expiration.

Directional Assumption: Bullish

Setup:
– Sell OTM Put (closer to ATM)
– Buy OTM Put (further away from ATM)

Ideal Implied Volatility Environment: High

Max Profit: Credit received from opening trade

How to Calculate Breakeven(s): Short Put Strike – Credit Received

Vertical spreads allow us to trade directionally while clearly defining our maximum profit and maximum loss on entry (known as defined risk).

While implied volatility (IV) plays more of a role with naked options, it still does affect vertical spreads. We prefer to sell premium in high IV environments, and buy premium in low IV environments. When IV is high, we look to sell vertical spreads hoping for an IV contraction. When IV rank is low, we look to buy vertical spreads to stay engaged and also use it as a potential hedge against our short volatility risk.

Since the maximum loss is known at order entry, losing positions are generally not defended. We always look to roll for a credit in general, and doing so with vertical spreads is usually difficult.

When do we close vertical spreads?
Profitable vertical spreads will be closed at a more favorable price than the entry price (goal: 50% of maximum profit

When do we manage vertical spreads?
Losing long vertical spreads will not be managed but can be closed any time before expiration to avoid assignment/fees.

Vertical Spread Videos

Mike And His Whiteboard

Trading Strategy | Spread Understanding

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Trading Strategy | Vertical Debit Spreads

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Strategy Comparison | Vertical & Diagonal.

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6/27/19: Portfolio Analysis – Adding Long Delta.

More Options Strategies

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AoJ / props.js forked from isaacs/props.js

// minimal vertical spread
w = < foo : "bar"
, foo2 :
, foo3 : < wow : "this" , is : "really" , getting : "long" >>
// some more vertical spread
x = < foo : "bar"
, foo2 :
, foo3 : < wow : "this"
, is : “really”
, getting : “long” > >
// a bit more
y = < foo : "bar"
, foo2 :
, foo3 :
< wow : "this"
, is : “really”
, getting : “long” > >
// maximally vertically spread
z = < foo : "bar"
, foo2 :
, foo3 :
< wow : "this"
, is : “really”
, getting : “long”
>
>
// in the case of a longer var name,
// wrap and indent to the next line is fine, too
// obviously, THIS var name is much too long,
// but it’s not uncommon to start an object far to
// the right, and in those cases, a \n and indent
// makes it easier to look at.
aLongVarNameThatLeavesLittleRoomAfterIt =
< foo : "bar"
, foo2 :
, foo3 : < wow : "this" , is : "really" , getting : "long" >>
// It’s sometimes more convenient to omit the first
// indent. I don’t do this in npm, but do in some
// other projects. Just be consistent.
bLongVarNameThatLeavesLittleRoomAfterIt =
< foo : "bar"
, foo2 :
, foo3 : < wow : "this" , is : "really" , getting : "long" >>
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