Option Spread Strategies

It’s common for new traders to jump into the options game with little or no understanding of how options spreads can provide a better strategy design. With a little bit of effort, however, you can learn how to take advantage of the flexibility and full power of options as a trading vehicle. To help you get started, we've put together this tutorial on options spread strategies, which we hope will shorten the learning curve. 

Outrights

Most options traded on U.S. exchanges take the form of what are known as outrights – the purchase or sale of an option on its own. What the industry terms "complex trades" comprise just a small share of the total volume of trades. It’s in this category that we find the complex trade known as an option spread.

Risk Strategy

Using an option spread involves combining two different option strikes as part of a limited risk strategy. While the basic idea is simple, the implications of certain spread constructions can get trickier.

This tutorial is designed to help you better understand option spreads – including what they are, when they should be used, their risk profiles and conditions for best use. The tutorial also explains how to assess the potential risk (measured in the form of the "Greeks – Delta, Theta, Vega) involved with the different types of spreads used, depending on whether you are bearish, bullish or neutral. (For a refresher on the basics of options and option terminology, see: Options Basics: What are Options?)