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Essential Option Strategies by J. Kinahan

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Chapter 12Long Vertical Spreads

The strategies covered to this point are simple strategies that include just one options contract. The covered call, for example, is the purchase of underlying security along with the sale of call options. Meanwhile, a cash-secured put strategy and the short put strategy involve selling a specific put option. Buying long calls and long puts was covered earlier as well.

The remaining strategies are spread trades that involve more than one contract. One thing to keep in mind with spread trades is that they achieve maximum value if the underlying closes on expiration day at or near the short strike. This chapter explores long vertical spreads. The strategy involves buying one option and selling another option within the same expiration term but with different strike prices. The term vertical is due to the fact that the options appear vertically on the options chain. Like a long call or a long put, a long vertical spread is a directional strategy that is typically initiated when an investor is expecting the underlying to make a significant move higher or lower.

First I will consider the long vertical spread with call options. Also known as a bull call spread, the position is simply buying a call at one strike and selling another call at a higher strike. The strategy makes sense when the investor is expecting the underlying to move higher. The bear put spread, on the other hand, is the purchase of a put and the sale of another put at a lower strike. ...

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