Best Vertical Spread Option Strategy

   

What’s The Best Vertical Spread Option Strategy?

Today, I’m going to talk to you about vertical option spreads. What is the best vertical spread option strategy? I’ve heard other traders call vertical spreads a “weekly paycheck.” Is that true? If you ask me, that sounds amazing! 

In this article, I’m going to provide an in-depth look at each vertical spread strategy and discuss the pros and cons. I’ve written about other strategies like credit spreads and debit spreads, so you might be wondering how vertical spreads differ. 

Let’s break down each of the vertical spread option strategies. I’ll also show you actual trade examples from my account.

Okay, let’s get to it!

What is the best vertical spread option strategy? This page looks at 4 different types: Call Debit Spreads, Put Debit Spreads, Call Credit Spreads, Put Credit Spreads

Call Debit Spread  

What is a Call Debit Spread? Is this the best vertical spread options strategy? This type of spread requires you to make two simultaneous trades for the same underlying stock. 

First, buy a call option, and then at the same time, you will also sell a call option at a higher strike price. You will make these trades at those different strike prices but for the same expiration date. 

When should this strategy be used? The Call Debit Spread is also called a Bull Call Debit Spread because it implies a bullish sentiment. This strategy is used when you believe the price of the underlying stock will rise by the expiration date. 

What are the benefits of a Call Debit Spread? As a trader, I like these types of spreads because they reduce the overall cost of making the trade. It also reduces the break-even price of the trade. Here’s what I mean by this.

Debit spreads reduce the overall cost because your maximum potential loss is the cost of the two options. It’s a great way for those with a lower account balance to begin trading and typically requires a lower options trading level as well. 

Risks and Rewards

When can a Call Debit Spread lose money? As with any trading strategy, a Call Debit Spread can be a losing trade. How does this happen? When the price of the underlying stock moves sideways or downwards. 

What is the maximum potential risk for this trade? Since this is a debit spread it means we pay upfront for the potential premium. Thus, the maximum potential risk for a Call Debit Spread is the premium paid to take on this trade. 

What is the maximum potential reward for a Call Debit Spread? The maximum potential reward for a Call Debit Spread is the difference between the strike price of the two call options, multiplied by 100. Of course, as with any options debit, we subtract the cost of the premium paid to take on the trade. 

Call Debit Spread Example 

  • Reduced Margin Requirement: $910
  • Max Risk Reduced: $910
  • Max Reward: $4090
Call Debit Spreads Explained by looking at the trade layout, showing risks and rewards as well

Put Debit Spread

What is a Put Debit Spread? Is this the best vertical spread options strategy? Since we know that a Call Debit Spread is bullish, we can reasonably assume that a Put Debit Spread is bearish. 

A Put Debit Spread is a trade that requires you to buy a put option and sell a put option for the same underlying stock and the same expiration date but at different strike prices. It is also called a Bear Put Debit Spread. 

When should this strategy be used? This trading strategy is best used when you are bearish on the underlying stock. If you believe there is a near-term downside for the stock, you can use the Put Debit Spread to lock in some profits with reduced potential risk. 

What are the benefits of the Put Debit Spread? Just as with the Call Debit Spread, a Put Debit Spread can reduce the overall cost of taking on this trade. Once again, the break-even price of the trade is also lowered as a result. 

Risks and Rewards

When can a Put Debit Spread lose money? This trade loses when the price of the underlying stock moves sideways or downward.

What is the maximum potential risk for a Put Debit Spread? Again, this is another Debit Spread so we pay the premium upfront to take on the trade. The maximum potential risk of loss is the cost of that premium. 

What is the maximum potential reward for a Put Debit Spread? The maximum reward for this strategy is the difference between the strike price of two put options, multiplied by 100. As always, we subtract the cost of the premium paid upfront to take on the trade. 

Put Debit Spread Example 

  • Reduced Margin Requirement: $910
  • Max Risk Reduced: $910
  • Max Reward: $2090
Put Debit Spread Example in Tastyworks  and Layout, allowing traders to see how to set up this kind of trade

Call Credit Spread

What is a Call Credit Spread? Now we’ll move on to credit spreads. Is this the best vertical spread options strategy? A Call Credit Spread is a trade where you simultaneously sell a call option and then buy a call option for protection. As with a Call Debit Spread, these two option contracts have the same expiration date but different strike prices. 

A Call Credit Spread is a bearish trade and can be used as a safer way to sell uncovered call options. In a Call Credit Spread, you sell the initial call options at a lower strike price and buy the additional call option at a higher strike price. 

When should this strategy be used? A Call Credit Spread is best used when you believe that the underlying stock is going to decrease in price. This trade is popular because it also turns a profit if the stock price remains neutral as well. 

What are the benefits of a Call Credit Spread? Unlike a Debit Spread, a Credit Spread provides you with a premium for selling the initial Call Option. 

When you buy the additional call option it acts as protection for the initial call option contract. 

Risks and Rewards

When does a Call Credit Spread trade lose money? A Call Credit Spread can lose money when the price of the underlying stock moves higher, past your strike price. 

What is the maximum potential risk for this trade? The maximum potential risk associated with this strategy is the difference between the two strike prices, multiplied by 100. 

What is the maximum potential reward for a Call Credit Spread?  The maximum reward for a Call Credit Spread is the initial premium received for selling the call option or options. We must also subtract the cost of the premium we pay upfront for the additional call option.  

Call Credit Spread Example 

  • Margin Requirement: $965
  • Max Risk: $965
  • Max Reward $35
  • Premium Received: $35
Call Credit Spread Example and Layout, allowing traders to see how to set up this kind of trade

Put Credit Spread

What is a Put Credit Spread? A Put Credit Spread is a trade in which you sell a Put Option and then Buy an additional Put Option as protection. Is this the best vertical spread options strategy? Again, both of these options contracts have different strike prices but the same expiration date. 

A Put Credit Spread is a bullish trading strategy that looks to take advantage of an upward movement in the underlying stock price before the expiration date. This strategy requires you to sell a Put Option and then buy an additional Put Option at a lower strike price. 

When should this strategy be used? Use the Put Credit Spread strategy when you believe the price of the underlying stock will increase or trade sideways by the expiration date of the contracts. 

What are the benefits of a Put Credit Spread? When you execute a Put Credit Spread, it produces a credit from the premium you receive from selling the Put Option. 

When you buy the additional put option it provides protection and limits the risk of the trade.

Risks and Rewards

When does a Put Credit Spread lose money? You will lose with a Put Credit Spread if the price of the underlying stocks moves downward past your strike prices. 

What is the maximum potential risk for a Put Credit Spread? The maximum potential risk with a Put Credit Spread is the difference between the two strike prices, multiplied by 100. 

What is the maximum potential reward for a Put Credit Spread? The maximum reward for this position is the premium received for selling the put option, minus the premium paid for protection. 

Put Credit Spread Example 

  • Margin Requirement: $837
  • Max Risk: $837
  • Premium Received: $163
  • Max Reward: $163
Put Credit Spread Example and Layout, allowing traders to see how to set up this kind of trade

How Do I Choose The Best Vertical Spread Option Strategy?

If you ask me, I only use the vertical spread options strategy that matches my trading plan. If you’ve been following my articles or YouTube channel, you’ve heard me say this a million times. There are 3 things we need to know for successful trading:

  1. You need to know which options and stocks to trade
  2. You need to know when to enter the trade
  3. You need to know when to exit the trade

For these three things, I use the PowerX Optimizer program to help me execute these trades successfully. If you want to learn more about how the PowerX Optimizer works, click here.

What’s The Best Vertical Spread Option Strategy To Use?

To learn more about the successful trading strategy I’ve developed that can be used in any market condition, click here.

If you found this article on the best vertical spread options strategy helpful, feel free to share and leave a comment below!

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