An options spread position buys or writes multiple options on the same underlying asset with one or more of the following: differing prices, differing expiration dates, or differing underlying assets. There are also other possibilities, such as differing Greek indicators. Options Spread positions modify the indicators: the combined options’ Greek values combine to a different overall amount than either option alone. A spread can profit from holding the position until expiry or unwinding the position before the expiration date.
The type of spread is determined by the specific option factors manipulated. Spreads split into 3 major camps: Vertical, Horizontal, and Diagonal. Vertical spreads are constructed to take advantage of strike price differences. Horizontal spreads are constructed to take advantage of differing expiration dates. Diagonal spreads are constructed to take advantage of both. Occasionally, options traders will attempt to neutralize effects of Greek indicators.
An options spread often uses two puts or two calls on the same underlying asset. One of the options is written, and the other option is purchased. The option which is written pays for the options which are purchased in part or in full. Spreads are useful for controlling and modifying risk exposures. Options strategies can either be a debit strategy or a credit strategy. Debit spreads require initial expenses, and occur if the purchased option is worth more than the sold option. Credit spreads earn initial income, and occur if the sold option is worth more than the purchased option. It’s important to understand the options spread, especially vertical spreads, as they are the building blocks of many complex options strategies.
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