One of the ways active traders can secure bullish or bearish exposure with limited risk is by using a vertical spread. In this blog article, we’ll break down what this strategy is and how it can help you reach your financial goals.
A vertical spread is an options trading strategy in which a trader simultaneously buys or sells calls or puts on the same contract at different strike prices. The immediate result is a bullish or bearish position in the market, as well as a net credit or debit created by the written and purchased options.
In the live market, this options trading strategy comes in four types:
The strategies enable the trader to secure either a bullish or bearish market exposure. In comparison to outright futures, each spread’s potential outcome is known and not subject to the extreme gains or losses created by unexpected volatility.
Although understanding the nuances of vertical spreads can be challenging, they do offer traders several key advantages. Here’s a look at three of the most prominent:
Perhaps the greatest reason traders execute vertical spreads is that they offer a finite risk versus reward matrix. In each type of strategy, both the maximum risk and reward are quantified, which provides a major advantage when optimizing an active trading portfolio. With the vertical spread, there are no surprises because the market is engaged in a specific, rigid fashion.
As in the futures trade, it’s possible to open both short and long positions with vertical spreads. These strategies are also viable on any asset that features an options chain. Among the most popular are the equities indices, ag commodities, metals, and energies.
A vertical spread strategy may be implemented on near-term or deferred-expiry options contracts. In this fashion, a trader can fully customize the trade or investment’s horizon.