![]() By the time of option expiration, you feel that XYZ will likely trade above $105 but will not climb higher than $110. Let’s suppose shares of XYZ are trading at $100, and you have no current position in the stock. To gain a better understanding of how a spread trade works, let’s take a look at an example… However, in exchange for this lower transaction cost, the investor will essentially forfeit any gains they would have earned above a certain set level. The income received will not be enough to offset the cost of buying the first option, but it will lower the overall cost of the trade. Since this type of trade involves the sale of an option, the trader will receive initial income from this transaction. Both contracts should expire in the same month. To execute a spread trade, the investor must buy an option at one strike price, then sell an option at a strike price farther out of the money. An investor might utilize this strategy if they feel that a stock will move in one direction but believes the gains will be limited. ![]() A spread is very similar to a covered call, except it basically involves covering an option instead of the underlying stock. ![]() As you may remember, this involves selling an option on a stock you currently hold in your portfolio. We’ve discussed the process of writing a covered call before. This is known as a “spread” trade and can offer tremendous benefits depending on how it’s implemented. It essentially involves taking two option positions on the same stock. So today, let’s move beyond the basics and discuss an options strategy that’s a little more complex (but not too complicated). Some are riskier (or more complicated) than others. The truth is, there are many options strategies out there. We’ve even delved into some intricacies of these strategies and how traders can maximize their chances for success. We’ve also covered why some of the basic assumptions investors make about options (that they’re risky or complicated, for example) are not always correct. In the past, we’ve focused on how traders can do things like buy calls, sell covered calls, buy puts, or sell puts. We’ve covered some of the basic options strategies out there before.
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