Basic trading strategies involving optionsspread and combination
Many options strategies are built around spreads and combinations of spreads. For example, a bull put spread is basically a bull spread that is also a credit spread while the iron butterfly can be broken down into a combination of a bull put spread and a bear call spread. A box spread consists of a bull call spread and a bear put spread.
The calls and puts have the same expiration date. The resulting portfolio is delta neutral. For example, a January box consists of:. A box spread position has a constant payoff at exercise equal to the difference in strike values. Thus, the box example above is worth 10 at exercise. For this reason, a box is sometimes considered a "pure interest rate play" because buying one basically constitutes lending some money to the counterparty until exercise. The net volatility of an option spread trade is the volatility level such that the theoretical value of the spread trade is equal to the spread's market price.
In practice, it can be considered the implied volatility of the option spread. From Wikipedia, the free encyclopedia. For the American football offensive scheme, see Spread offense. This article needs additional citations for verification.
Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. April Learn how and when to remove this template message. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Options finance Derivatives finance. Any spread that is made up using only calls is known as a call spread, while one that is made up using only puts is known as a put spread.
Spreads can also easily be classified based on the capital outlay involved. When you create one you will either incur an upfront cost or receive an upfront credit. If you incur an upfront cost by spending more on buying contracts than you receive from writing contracts, then this is known as a debit spread. If you receive an upfront credit by spending less on buying on contracts than you receive from writing contracts, then this is known as a credit spread. Another method for classifying spreads is based on the positions of the options relative to each other on an options chain.
Spreads that involve buying and writing contracts of the same type, same expiration date, and the same underlying security but with different strike prices would appear vertically stacked on an option chain and as such are known as vertical spreads.
Those that involve buying and writing contracts with different expiration dates, but the same type, same strike price, and same underlying security are known as horizontal spreads. Buying and selling options that have different strike prices and different expiration dates, but are the same type and same underlying security, is creating a diagonal spread.
These involve options that have different expiration dates. Horizontal spreads and diagonal spreads are both examples of calendar spreads, but there are other types too. They are essentially used to try and profit from differing rates of time decay between the contracts written and the contracts bought.
This is applied to any spread that involves buying and selling differing amounts of options contracts, as opposed to buying an amount of contracts equal to the amount written. Typically they involve writing more contracts than are being bought, but the ratio can work either way around depending on what strategy is being used. The different types of spread is a very important subject in options trading, as most strategies involve using them. There are many different types, and they are not all covered in this particular section.
Instead, we have just covered the main categories, explaining their basic characteristics, and showing you how they can be used. We would suggest familiarizing yourself with the information in this section first, but for a more comprehensive list of the different types you can read our section on options trading strategies.