subject: Vertical Spread - Who's Your Daddy Now, Wall Street? [print this page] A number of different techniques and strategies are available to option investors to help assist them in achieving consistent and reliable monthly income from the option market.
Some of these different strategies include the calendar spread, the butterfly spread, the diagonal spread, the iron condor, and the Vertical Spread, also known as the Credit Spread.
In actuality, the vertical spread can be discovered inside found many of the previously talked about strategies. It is a core foundational trade to each of their makeup. Take for instance the iron condor. This trade is constructed from two separate vertical spreads - a put credit spread and a call credit spread - each positioned above and below where the underlying stock is currently trading at.
The butterfly position is also comprised of vertical spreads. The lower half portion of the butterfly spread is simply a vertical spread - as is the top half. Same goes with the iron butterfly. This trade also is built from verticals - a call vertical and a put vertical.
The vertical spread trade can be built from either call options or also put options.
Following is an illustration of a bull put vertical spread...
Sell 5 RIMM 50 Call Purchase 5 RIMM 50 Call
This hypothetical vertical spread will profit if the stock XYZ stays where it is trading at (or in other words NOT go up) - or heads down. It is a bearish play.
Some might think that because we are using calls this should be a bullish position, however this is not the case since we are selling the option that is closer to money, hoping to capture the time premium in the event that the stock moves down.
As long as the outlook on this trade is correct and RIMM stays where it is at or heads downwards, this trade will 'win' and the initial credit received when the trade was first placed will become the profit.
