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 2014) ( Learn how and when to remove this template message)Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates.The three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread.
By John Summa, CTA, PhD, Founder of Optionx often, new traders jump into the options game with little or no understanding of how options spreads can provide a better strategy design. With optiions little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle.
By John Summa, CTA, PhD, Founder of OptionsNerd.comNow that you have obtained a solid foundation for underlying option spreads, here are some tips on sppread to use them. For example, if youbuy a call option for stock XYZ, and sell anothercall option for XYZ, you are in fact spread trading.By buying one option and selling another, you limityour risk, since you know the exact difference ineither the expiration date or strike price (or both)between the two options.
This difference is knownas the spread, hence the name of this spread treadingtechnique.Spreadtrading is carried out by buyingan option, and selling an optionof the same type for the same stock.