Options Education

Options Spreads

 

If you find your self thinking "how can I ever understand or remember this?" keep in mind that it doesn't matter how many options strategies there are, there are only two basic types of options: Calls and Puts. A spread trade is a variation that involves the buying and selling of options simultaneously on the same underlying.
There are specific advantages to spread trades, each strategy having a specific application. In general, spread strategies should be used when the outlook for a particular stock is neutral to slightly bullish or neutral to slightly bearish. The key word to remember here is "neutral." Spreads can be a great way to make money when you think a stock will remain in a fairly narrow trading range. However, since most spread strategies involve both Calls and Puts, you tend to limit your profits if a stock moves quickly in one direction or the other.
A particularly bullish outlook on a given stock is best served when you buy a Call option rather than play a spread, with which you'd likely dilute your gains with an incremental loss on the wrong side of the spread. Of course, the same is true when you're very bearish on a particular stock.