Options SpreadsGuide
Combine options for defined risk, reduced costs, and precise market predictions.
What are Options Spreads?
A spread is an options strategy where you simultaneously buy one option and sell another. Both options have the same underlying asset but differ in strike price and/or expiration date. Spreads allow you to limit risk and reduce costs.
Benefits of Spreads
Defined Risk
Your maximum loss is known and limited from the start.
Reduced Costs
The sold part partially finances the bought part.
Lower Margin
Brokers often require less collateral for spreads.
Flexibility
Adapt your position to various market scenarios.
Bull Call Spread
Moderately bullishA Bull Call Spread profits from a moderate price increase. You buy a call with a lower strike and sell a call with a higher strike.
Setup:
- 1Buy 1 Call with Strike A (lower)
- 2Sell 1 Call with Strike B (higher)
- 3Same expiration, same underlying
Example: Apple at $175
Scenarios at Expiration:
Bear Put Spread
Moderately bearishA Bear Put Spread profits from a moderate price decline. You buy a put with a higher strike and sell a put with a lower strike.
Setup:
- 1Buy 1 Put with Strike A (higher)
- 2Sell 1 Put with Strike B (lower)
- 3Same expiration, same underlying
Example: Tesla at $250
Scenarios at Expiration:
Credit Spreads
With Credit Spreads, you receive a net premium when opening the position. You profit when the options expire worthless.
Bull Put Spread
Outlook: Neutral to bullish
Setup: Sell Put (higher strike) + Buy Put (lower strike)
Profit when: Price stays above sold strike
Bear Call Spread
Outlook: Neutral to bearish
Setup: Sell Call (lower strike) + Buy Call (higher strike)
Profit when: Price stays below sold strike
Debit vs. Credit Spreads
| Aspect | Debit Spread | Credit Spread |
|---|---|---|
| Cost to Open | You pay premium | You receive premium |
| Profit | When options gain value | When options expire worthless |
| Time Value (Theta) | Works against you | Works for you |
| Examples | Bull Call, Bear Put | Bull Put, Bear Call |
| Market Expectation | Directional movement | Avoid movement |
Types of Spreads
Vertical Spread
Same expiration, different strikes
Example: Bull Call Spread, Bear Put Spread
Horizontal (Calendar) Spread
Same strike, different expirations
Example: Sell short-term, buy long-term option
Diagonal Spread
Different strikes AND expirations
Example: Combination of Vertical and Calendar
Important Calculations
Tips for Spread Trading
Check liquidity
Ensure both legs have sufficient volume.
Use spread orders
Trade the entire spread as one order, not individual legs.
Consider strike width
Wider spreads = more profit potential, but higher risk.
Choose expiration
30-45 days often offers the best risk-reward ratio.
Set profit target
Close at 50-75% of max profit to reduce risk.
Limit losses
Set a stop-loss at e.g., 1.5x the premium.