Option Investor
Educational Article

Vertical Spread

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1) How to choose the appropriate stock
2) How to profit in an up or down market
3) How to insure trades from loss
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Much has been said about the risk involved in trading options. Certainly, there are many options trading strategies where the potential for monetary loss is exponentially large and a few of the more aggressive techniques can result in draw-downs in excess of the capital invested. As well, options are somewhat complicated and typically require more effort than simply investing in stocks because of the numerous variables that affect the outcome of a trade. However, those who take the time to learn the fundamentals of derivatives ultimately have greater opportunities for profit regardless of the current environment.

One of the methods professionals frequently use to offset the risks inherent in options trading is hedging. By combining various long and short positions, a trader can create a specific profit/loss outlook or protect against a particular type of market activity. The easiest way for retail participants to employ this tactic is through spreading; simultaneously buying and selling options that differ in price and/or time frame. When the market is trending, most spreaders focus on positions that benefit from an accurate directional forecast. This technique is typically referred to as a vertical spread.

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