If you choose to generate consistent cash-flow from option trading, you might wish to think about the advantage of Options Spread Trading over simply buying calls or puts and hoping for the market to go in the anticipated direction. Option spreads can be used in a number of ways, from the basic debit or credit spread, to more advanced and compound tactics such as the calendar spread, the butterfly, the iron condor and the like.
So what is it that describes an option spread? It is simply about taking opposite positions in terms of buying to open and selling to open (ie. writing) a quantity of option contracts for the same underlying fiscal mechanism, but using diverse strike prices or expiry dates, thus generating a spread of positions as an element of a particular strategy.
Advantages
Generating a spread can give a number of benefits. First of all, although it will cost you more in brokerage, the overall position will typically be less expensive than just straight out purchasing. This can make all the difference if your trading capital is not very big. Your trades will cost less, so you have more control over wealth management.
A spread will typically reduce or reduce the element of option price instability, or at least allow you to employ it to your advantage. Volatility is when an option strike price becomes inflated or deflated in comparison to the historical instability of the underlying, owing to high or low demand at the time.
A spread will allow more flexibility when deciding on the expiry date. Because you are selling open as well as purchasing, you can often stretch out the expiry date of both positions without touching your overall price for the trade. This will lgive you more time to earn a income.
Flexibility
With spreads, you can sometimes take advantage of the circumstances even when the price goes against you. Let’s consider you have taken a call debit spread, bearing in mind that thecost of the underlying has fallen lately and hoping it is going to rise. But to your disappointment, it continues to drop. This now means that your ‘sold’ position, being further ‘out of the money’ than your bought positions, will be very low-priced. So you can now purchase it back for a portion of what you received for it. If you’ve allowed yourself plenty of time, you now have only your bought position and just wait for the underlying price to go up again.
So now you could even ‘average down’ by taking out another call debit spread at cheaper strike costs. The mixture of this new spread, plus the long call still held from the old position, could make you good over 100 percent income on your asset, even if the stock only goes back to it’s original stage at the time of your original trade.
The above scenario assumes the underlying is not now taking a long termdrop due to some financial crisis or extremely bad news. If this happens, you would stay concentrating on bear put spreads. The income on the put spread would offset the loss on the call spread.
Options Spread Trading grants the trader with some powerful advantages over simply ‘going long’ on an option contract. These advantages give greater flexibility when things go bad, decrease your cost per trade and allow you to extend an ending date of your positions (assuming there is sufficient open interest) at little or no greater expense. There are some other things you need to consider, but if you realize what you’re doing, there is a huge money that can be to be earned.
Hassam 