Option Spread
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<< Credit Spread Spread Option >>
Perhaps my favorite option spread strategy is the credit spread – or sometimes also referred to as the vertical spreads.
The option credit spread is a basic building block option position for other option strategies, such the iron condor spread and
the butterfly spread.
This position is made up of a sale of one option and the purchase of another option (both need to be calls or puts) to ‘cover’ it. For example, a call credit spread on IBM might look as the following spread option example shows:
Sell 1 125 call
Buy 1 30 call
What the non directional trading investor in the above example is trying to accomplish is to sell the premium in the 125 call for more than is paid for with the 130 call.
Then, as time goes by and the option start to decay, as long as IBM remains below the 125 level – at some point the credit spread trader can close the position for profit – or simply wait until the end of the expiration cycle and let the options expire worthless – assuming of course that IBM never breaches the 125 level before options expiration.
photo credit: sarniebill1
