What are different types of Spread strategies ?

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Spreads are classified by following parameters

Expiry date of each leg

1) Vertical Spread – Expiry of both legs are in same month (eg – buy 1 Call 5000, Sell 1 Call of 5100 of same contract month)

2) Diagonal Spread – Expiry of both legs are in Different month. If strikes are same, then the spread is also referred as Calender Spread. (eg – buy 1 Call 5000 of near month, Sell 1 Call of 5100 of next month)

Quantity of options contract used in each leg

1) Ratio Spread – one of the leg has more number of contracts then other leg (eg – buy 1 Call 5000 and sell 2 Call 5100 strike)

Nature of the spread

1) Bullish Spread – (eg – Buy lower strike option, Sell higher strike option)

2) Bearish Spread – (eg – Buy higher strike option, Sell lower strike option)

Nature of initial cash flow

1) Debit – where your acct is debited while opening the position (eg – for bullish spread, Buy lower Strike CALL and Sell higher strike CALL, or for bearish spread, Buy higher strike PUT and sell Lower strike PUT )

2) Credit – where your acct is credited while opening the position (eg – for bullish spread, Buy lower Strike PUT and Sell higher strike PUT, or for bearish spread, Buy higher strike CALL and sell Lower strike CALL)

Happy Trading

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2 Comments on “What are different types of Spread strategies ?”

  • Raunak
    11 September, 2010, 5:28

    Anup, 

    Let’s say I know that in the next 5-10 days I am definitely going to see trend. How do I benefit from it. For example, lets assume market is at 5000. I am expecting that in the next one month market will be either 5200 or 4800. How do I benefit using options. Also, what if market reaches these targets within 10 days from the day I expect the markets to move. How do I benefit? 

    Tc

  • Trader anup
    14 September, 2010, 15:55

    Raunak, Please check this post where I have given few strategies to trade the breakout. Some of them are directional (i.e. you have view about direction of the breakout) and some are direction neutral.

    http://niftyoptionstrader.com/options-strategy-for-trading-increase-in-volatility/

    Simplest of this will be to buy OTM spreads on either side (for direction neutral) or one side (for direction) to benefit from forthcoming trend.

    Hope this helps

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