Trading Debit Spreads
By: Chuck Hughes
November 29, 2018
The Optioneering Team recently participated in the MetaStock Traders Summit. During the Summit the Optioneering Team explored an option spread strategy that can profit in up or down markets.
Call option debit spreads have a long position and a short position. The long position profits as the underlying stock moves up in price. The short position profits as the underlying stock moves down in price. The short position provides downside protection if the underlying stock declines in price.
Call option debit spreads have several advantages over directional call option trades.
- A call option spread is created by simultaneously purchasing a call option and selling a call option with a higher strike price. The sale of the call option reduces the cost of the option purchase. Most option debit spreads cost $600 to $800.
- The sale of a call option results in cash being credited to your brokerage account. This reduces the cost basis of the option purchase and provides downside protection in the event the price of the underlying stock declines in price.
- Option spreads can be profitable if the underlying stock price increases, decreases or remains flat at option expiration. Many of our call option debit spread trades can profit if the underlying stock is down as much as 10% at option expiration.
Whenever a spread trade can profit if the underlying stock price increases, decreases or remains flat at option expiration it will result in a higher percentage of winning trades compared to directional option trades and will make you a more successful trader.
In this video learn how to set up option spread trades that can profit in up, down or flat markets.
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