CHAPTER 12

Bullish Spread Trading

A bullish vertical spread is probably one of the best uses of the option market. The spread involves taking a combination of a long and short position in the same type of option. The result is a reduction in exposure to time decay and potentially a lower dollar cost when comparing the spread trade to buying a call option when having a bullish outlook. These spreads are very practical in that they allow a trader to benefit from an outlook for a stock or market where there is a target price involved. One of the reasons many traders will shy away from using a vertical spread relates to time decay. In order to realize the full profit expected from a bullish vertical spread the trade will need to be held until there is very little time left until expiration. However, now that short-dated options are available and there are options that expire every Friday, when a trader has a bullish outlook for an underlying market, they should give a strong consideration to putting on a vertical spread.

Bullish Vertical Spread

A bullish vertical spread may be initiated using either call or put options. Despite which type of option is used, the trade will be constructed through buying a lower strike option and purchasing a higher strike option. A call with a lower strike will cost more than a call sharing an expiration date with a higher strike so a bullish spread created with call options would be created by incurring an account debit or cost. A put option with ...

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