RSS FeedA preferred non directional trading strategy is the option Vertical Spread. This strategy is one of the easier option spreads to comprehend for newer option traders. In addition it is simple to place and there is not much to do management wise while the trade is in play – which allows the vertical spread trader to be freed from their trading chair and not have to watch every up tick and down that the market makes all day.
The vertical spread trade is a basic building block of many if not most other more complex option trading strategies such as the iron condor spread, the butterfly, and the double diagonal trade. For example, the butterfly is created using one credit spread and one debit spread, while the iron condor is made up from two credit spreads, one on either side of where the underlying is currently trading at.
These trades are popular due to their high probability of winning. When placed and traded properly, it is possible for vertical spreads to provide the trader with consistent income month after month – without the trader having to be right about market direction. Basically, those who trade this strategy just need to be correct about one thing which is where the stock or index being traded will not go.
For example let’s say our trader is bearish on the stock XYZ. XYZ is trading at a recent high and our trader believes that the stock will not move any higher over the next 30 days. So, he sells a bear call spread – a call option vertical spread that benefits in a neutral to bearish scenario.
This trade can win in 3 of 4 possible stock movement scenarios by using this option spread. If the stock drops like our trader thinks it will, the spread trade wins. If the stock doesn’t move up or down – just stays pretty much in the same area as it currently, the spread wins. Even if the stock moves upwards – defying what our trader believes will happen – this spread trade could still be profitable – as long as it doesn’t move above a certain level. So, in each of these scenarios, this trade would be profitable. The only way they would not be profitable is if the stock moves up past the level that has been sold – in which case the trader would then need to either remove the trade for a possible loss – or adjust the trade in an attempt to make it profitable once more.
Looking for specific instructions on how to trade the vertical spread, then visit www.verticalspread.net to find the best tips and step by step details on trading this strategy and the credit spread for monthly income.
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