Spread strategies: trading one option against another
A spread finances one option with another. That single idea — pay for a right, sell away part of it — turns an open-ended bet into a defined structure with a known maximum profit and, usually, a known maximum loss. Spreads are where options stop being lottery tickets and start being instruments.
What are spread strategies? A spread strategy holds two or more options of the same type on the same underlying, differing in strike, expiry, or both. Vertical spreads differ by strike, horizontal (calendar) spreads by expiry, and diagonal spreads by both. Ratio spreads change the quantities, which is what reintroduces undefined risk.
Bull Call Spread
BullishA Bull Call Spread buys a lower-strike call and sells a higher-strike call of the same expiry for a net debit, giving a moderately bullish position w…
Bear Put Spread
BearishA Bear Put Spread buys a higher-strike put and sells a lower-strike put of the same expiry for a net debit, a moderately bearish position whose maxim…
Bull Put Spread
BullishA Bull Put Spread sells a higher-strike put and buys a lower-strike put of the same expiry for a net credit, a moderately bullish position that keeps…
Bear Call Spread
BearishA Bear Call Spread sells a lower-strike call and buys a higher-strike call of the same expiry for a net credit, a moderately bearish position that ke…
Call Ratio Spread
NeutralA Call Ratio Spread buys one call and sells two higher-strike calls of the same expiry, usually for a net credit; because it is net short one call, t…
Put Ratio Spread
NeutralA Put Ratio Spread buys one put and sells two lower-strike puts of the same expiry, usually for a net credit; because it is net short one put, the wo…
Call Ratio Backspread
BullishA Call Ratio Backspread sells one lower-strike call and buys two higher-strike calls of the same expiry; being net long one call, its risk is defined…
Calendar Spread
NeutralA Calendar Spread sells a near-dated option and buys a longer-dated option at the same strike for a net debit, profiting when time decays the short l…
Diagonal Spread
BullishA Diagonal Spread sells a near-dated option and buys a longer-dated option at a different strike, combining the time-decay edge of a calendar with th…
Vertical Spread
Direction-agnosticA Vertical Spread combines a long and a short option of the same type and expiry but different strikes; the shared expiry and the strike width togeth…
Horizontal Spread
NeutralA Horizontal Spread, the taxonomic name for a calendar, pairs two options of the same strike and type whose expiries differ along the time axis of th…