A vertical spread strategy is to simultaneously buy and sell two options of the same underlying stock, same type (calls or puts), and same expiration date, but with different strike prices.
A vertical spread strategy is mainly used to serve the following two purposes:
1. For debit spreads, it is used to reduce the payable net premium.
2. For credit spreads, it is used to lower the risks of short selling option positions.
|
Type |
Definition |
Strike Price Comparison |
Debit/Credit |
Max Profit |
Max Loss |
Breakeven |
|
Long Call Spread (Bull Market) |
Long Call （C1)+Short call (C2) |
C2>C1 |
Debit |
C2 - C1 -Net Debit Paid |
Net Debit Paid |
C1 + Net Debit Paid |
|
Short Call Spread (Bear Market) |
Long Call （C1)+Short Call (C2) |
C1>C2 |
Credit |
Net Credit Received |
C1 - C2 - Net Credit Received |
C2 + Net Credit Received |
|
Short Put Spread (Bull Market) |
Long Put （P1）+Short Put （P2) |
P2>P1 |
Credit |
Net Credit Received |
P2 - P1 - Net Credit Received |
P2 - Net Credit Received |
|
Long Put Spread (Bear Market) |
Long Put （P1）+Short Put （P2) |
P1>P2 |
Debit |
P1 - P2 -Net Debit Paid |
Net Debit Paid |
P1 - Net Debit Paid |
A straddle strategy is to simultaneously hold a call option and a put option of the same underlying stock, same strike price, and same expiration date.
A straddle strategy aims to profit from volatility. You can use a long straddle strategy to profit when you predict large swings (sharp rises or falls) in the underlying stock. Conversely, you can use a short straddle strategy to profit when you expect the underlying stock to remain unchanged or moderately volatile.
A strangle strategy is to simultaneously hold a call option and a put option of the same underlying stock and same expiration date, but with different strike prices.
A strangle strategy aims to profit from volatility. You can use a long strangle strategy to profit when you predict large swings (sharp rises or falls) in the underlying stock. Conversely, you can use a short strangle strategy to profit when you expect the underlying stock to remain unchanged or moderately volatile.
A butterfly strategy is to simultaneously hold three call/put options of the same underlying stock, same expiration date, and same strike distance, with a ratio of 1:2:1.
When you are neutral on a stock, you may profit from a long butterfly strategy. Conversely, if you expect huge swings in a stock, you can use a short butterfly strategy to make a profit.
A condor strategy is to simultaneously hold four call/put options of the same underlying stock, same expiration date, and same strike distance, with a ratio of 1：1：1：1.
A condor strategy aims to make a profit by predicting price volatility. When you are neutral on a stock, you may profit from a long condor strategy. Conversely, if you expect huge swings in a stock, you can use a short condor strategy to make a profit.
An iron butterfly strategy is to simultaneously hold two call options and two put options of the same underlying stock, same expiration date, and same strike distance, with a ratio of 1:1:1:1.
A condor strategy aims to make a profit by predicting price volatility. When you are neutral on a stock, you may profit from a short iron butterfly strategy. Conversely, if you expect huge swings in a stock, you can use a long iron butterfly strategy to make a profit.
An iron condor strategy is to simultaneously hold two call options and two put options of the same underlying stock, same expiration date, and same strike distance, with a ratio of 1:1:1:1.
An iron condor strategy aims to make a profit by predicting price volatility. When you are neutral on a stock, you may profit from a short iron condor strategy. Conversely, if you expect huge swings in a stock, you can use a long iron condor strategy to make a profit.
A calendar spread strategy involves buying and selling two options of the same stock, type (call or put), and strike price, but different expiration dates. This strategy aims to make money from time decay.
If you think the stock will trade sideways after experiencing large swings, then you can use a long calendar spread to gain profits. On the other hand, if you anticipate large swings in the underlying stock price near-term but it will remain steady in the long term, then a short calendar spread may be used to profit.
A diagonal spread strategy involves buying and selling two options of the same stock, type (calls or puts) at the same time, but with different expiration dates and strike prices.
This strategy can be used to make a profit from time decay of options, or to trade in either a bullish or bearish direction by taking advantage of the difference between the bought and sold options' strike prices.