Friday, June 24, 2011

Vertical spreads

A common options strategy is a vertical spread. A bullish call spread is called a debit spread because funds are deducted from the account, while a bullish put spread is called a credit spread. Examples for AAPL July 11 options strategies:

Sentiment: Bullish-Neutral
Strategy: Credit spread
Long 300 Put, Short 310 Put
Breakeven: $309.24
Max profit: $76
Max loss: $924

Sentiment: Bullish-Neutral
Strategy: Debit spread
Long 300 Call, Short 310 Call
Breakeven: $309.35
Max profit: $65
Max loss: $935

Note that the strike prices are the same, regardless if they're call or put options. Personally I prefer credit spreads because if the strategy is successful, the options expire worthless so I don't incur commission fees. This is not a trade recommendation and is only an explanation of some basic trading strategies.

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