Trading Commodities, Commodity Options and Currencies (Collection)

chapter 6Limited Risk Option Spreads

Options are versatile trading tools. As we learned in Chapter 51, “Credit Spreads1,” it is possible to combine long and short options with differing strike prices to accomplish a common goal. Long option traders can reduce their cost and risk by implementing a spread in which one option is purchased and one option is sold at a strike price distant to the original. This type of strategy is referred to as a bull call spread or a bear put spread depending on whether puts or calls are used.

“If you don’t profit from your investment mistakes, someone else will.” Yale Hirsh

The primary benefit of using an option spread is the favorable break-even point. By selling premium further out-of-the-money, ...