Continuing Education Credit: 1 hour*
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In this module we will introduce four basic spreads called vertical spreads. We will examine the risk/reward profiles of these spreads along with when they may be preferable to other strategies.
Real life considerations are taken into account as we detail each of the following vertical spreads:
- Bull Call Spread
A bull call spread is a position that involves the purchase of a call option and the sale of a different call option with a higher strike price; both calls have the same expiration date, and the number of options bought and the number of options sold is equal. This section discusses:
— A bull call spread as a limited risk/limited reward, strategy.
— The downside risk and the potential profit on the upside.
— The calculation of the break-even point at expiration.
- Bear Put Spread
A bear put spread consists of purchasing one put contract, and simultaneously selling a second put with a lower strike price and same expiration month. An equal number of puts is also sold. This section discusses:
— The limited risk/limited profit potential aspect of this strategy
— The calculation of a bear put spread’s downside break-even point.
— Bear Put spread as and high volatility stocks.
— Points made relative to bull call spreads that apply to bear put spreads.
- Bear Call Spread
The bear call spread is a short vertical spread made up entirely of call options on the same underlying stock (or index). It’s constructed by purchasing a call with one strike price and selling (writing) another call with a lower strike price but same expiration month.
— Protecting the short call
— Margin requirements
— Potential profit and loss
- Bull Put Spread
A bull put spread as the sale of one put option and the purchase of a different put option having a lower strike price and same expiration month. Both options expire on the same date, and an equal number of options is purchased as is sold.
— As an investing strategy.
— As a trading strategy.
— Debit vs. credit spreads
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