What is an Option Spread?
Option spreads come in many forms. The type of option spread depends on how each option position is established. An option spread is when you either: write and/or purchase more than one type of option contract for a single security. The spreads each get their name from the different relationships between each contract on the security. Being familiar with, and understanding the various type of option spread is important when you’re dealing with options and each can be used strategically for different price movements and expectations.
The types of Option Spreads:
Position where multiple contracts have differences in Exp. Date and/or Strike
Vertical Spreads (Money Spreads): is buying or writing multiple option contracts at different strike prices for a single security, on the same expiration date. This can be done with either calls or puts.
Horizontal Spreads (Calendar Spreads or Time Spreads): is buying or writing multiple option contracts at the same strike price for a single security, on different expiration dates.
Diagonal Spread: is entering either a put or call position and going long and short on the same equity. The Long position has an expiration before the short position and typically the short position has a higher strike price than the long position.
Position where the short contract income pays for the long; or the long is more expensive than the income of the short
Credit Spread: is when you take a long position that costs less to take than the premium you received from simultaneously taking a short position.
Debit Spread: is when you take a long position that costs more to take than the premium you received taking a short position.
Position focused on directional movement up or down
Bullish Spread: is a variety of a debit and vertical spread combo. You simultaneously take a long and short position where the short position is has the higher strike and the long position has the lower strike. Whether you chose a bullish put spread or a bullish call spread this remains true.
Bearish Spread: is a variety of a credit and vertical spread combo. You take a long and a short position on the same equity on the same expiration date. The long and short positions have different strikes however. In a Bearish spread, the short position has a lower strike than the long position.
Position with either more Short contracts or more Long contracts
Ratio Spreads: Front spreads & Back Spreads
Front Spread: when the amount of your short positions exceeds the long positions you have.
Back Spread: when the amount of your long positions exceeds the short positions you have.
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