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The Right Way To Buy Options - Long Vertical Spread

3233 ratings | 207930 views
www.SkyViewTrading.com Most traders start out buying options because it’s the simplest option strategy to understand. If you think a stock will go up, you’d buy a call. If you think the stock will go down, you’d buy a put. Well this is NOT a very good trading strategy because you’ll lose money every single day due to time decay. No smart investor is going to buy a depreciating asset and call it an investment. Watch this video to learn a better way to buy options to make a directional bet on a stock but WITHOUT time decay hurting you. We’re going to show you how to trade the Long Vertical Spread to accomplish this. Also, make sure to sign up for our FREE 3 Video Lesson Series at www.skyviewtrading.com! Adam Thomas Sky View Trading what are options how to trade options how to buy options option pricing options explanation stock options option strategies Vertical Spread Option Strategy Vertical Spread Iron Condor Bull Call Spread How To Trade a Vertical Spread option trading basics option time decay
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Text Comments (253)
Sheshagiri Pai (3 days ago)
This is a Debit spread. What advantage does this have over a OTM Credit spread. i.e Sell Call @80 and Buy Call @90
johnny llooddte (3 days ago)
ahahah first you have to have 25,000 in your account to short.. and your risking 500 dollar loss to make 750.. youre insane
johnny llooddte (3 days ago)
80% of options die worthless
Nick Bertocchi (11 days ago)
these trade example profits seem rather unrealistic if theta (time) is slowly killing your long leg at the same time it's killing your short leg you sold. Are you going long farther out in time, say (68 days to exp) and shorting sooner (30 days or less to exp)?
Taloot B (15 days ago)
I just buy them in a good spot, weather it's a call or put. I don't see myself ever doing this. True limited loss but limited gains as well
johar Mohammad (16 days ago)
Now I know you never sold options. If you did, you would not make kind of silly mistakes you are doing in the video.
lmwai (20 days ago)
Regarding the vertical spread, Will we be issue the stock if we chose not to exercise both the buy call option?
Cornholio777 (22 days ago)
02:40 I'm struggling to figure out how you gonna make $250.00 on the short $80 when you are out of the money and it's worthless? Please show me the math
Cornholio777 (22 days ago)
It sounds like you break even but you save $250.00 in the strike price because we are risking only 500. In which scenario do we make money on the short 80 call? On the vertical Put, do you short buy high and sell low on vertical spread?
Daniel Levi (29 days ago)
How do you get $ 2 commissions?
dara youngsophean (1 month ago)
http://www.forextime.com/register/fxtm-the-global-authority?raf=50a221e2
Sam Rosenberg (1 month ago)
Can someone explain how we can sell a call without owning 100 shares of the underlying? It seems like most options :strategies" require you to own the underlying to execute the strategy
Gen Y (1 month ago)
I usually don't leave comments, but could not resist on this well put and we'll explained videos. And giving the example at the end of the video WOW it made my day. Great job!!
Fareed A (1 month ago)
Very helpful! Thank you.
DuuudeMaaan (1 month ago)
Great video. Made it easy to understand
Gergo Vigh (1 month ago)
Your trading confidence might drop if you have been trading all wrong or with out a proper trading strategy , thankfully trading FX and buying Options has been good for me since i started using the SPI strategy which was created by Dmitry Vladislav. you can search about it on Google a lot of traders are doing really well with it, or Email [email protected] .cc.
Edler Hufnagel (2 months ago)
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Blake Malcolm (2 months ago)
Why wouldn't you just buy a long call at 75 - that would be cheaper than buying a call in the money and you don't limit your upside potential?
Sky View Trading (2 months ago)
Because in that case, you're hit hard by time decay. Not only does the stock has to move, it has to move big for you to even break even... With this strategy, time decay does not hurt you and even if the stock stays flat, you will breakeven.
Ankit Patel (2 months ago)
Awesome video
Giovanni Garibotto (3 months ago)
Hello, regarding doing puts perhaps i purchase at X then on bracket i do profit taker 10% down so if i win appears negatives numbers on monitor so i dont understand please help ☺ if the software is that way or i am makimg mistake, thanks.
m0wn3d (3 months ago)
Thanks for your videos. I learned a lot. Love your voice btw. :-)
Chris Evans (3 months ago)
I just watched this and think I understand but, after some digging it looks like Robinhood (the place I usually buy stocks) doesn’t allow shorting atm.
Sky View Trading (3 months ago)
This is why Robinhood is not a great brokerage firm in our opinion. There are many others that are better. www.skyviewtrading.com/preferred-broker/
Dan A (3 months ago)
Hi, thank you for the video! But when I try to place a long vertical spread in thinkorswim, my max loss always greater then my max profit, why is that?
invisible gank (3 months ago)
Yo in your video the short 80 makes profit no matter what the stock does that is not possible
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Kyle (4 months ago)
If anyone can help me out here, I’m a young investor just stating out and have tasted making some money so I’m looking into deeper strategies for options trading, so great video but my question is that what happens when you sell a call option or when it expires? We make money from that? I thought we’d lose it because the price didn’t go above 80 so it expires worthless and we lose all that money. Any clarification would be great!
Judy Derby (4 months ago)
I have a put option that expires this Friday. The option is selling at 3 cents, and my account won't let me sell to close in less than 5 cent increments. I am worried about getting assigned. (I don't know what's going to happen.) But if I do get assigned to buy the underlying shares, my strike price is $2, and the shares are selling at $2.40. Couldn't I turn around and sell the shares and make my money back?
Alexander Golovin (4 months ago)
I don't understand why you would buy the 70 Strike options when you think the stocks will go up.
AIR LEBRON (1 day ago)
Alexander Golovin ya doesnt make any sense..its like reverse
سبحان الله (4 months ago)
ممتاز لو يترجم
Eric Kirby (4 months ago)
In this strategy, you are keeping your options until expiration?
Jennifer Gonzalez (5 months ago)
Why do you still make +250 when your short is worthless at 80?
reydorf davidson (5 months ago)
What approval levels do u need to trade define risk
marlm10 (5 months ago)
Do you always buy itm?
Jun dela Cruz (5 months ago)
If the call expires in the money the single $75 call profits $5 x100 = $500 while the vertical Bull Call Spread results to $500 -$250= $250
Golden Stocks (5 months ago)
If you sell a call though aren’t you obligated to buy the shares if shit hits the fan? I don’t even think I have an account able to sell a call.
Narasimha Vempaty (6 months ago)
I traded amzn spreads with call options using techniques detailed here. With expiration still almost 5 days away, the break even, profit etc calculated here in this video are no where near the actuality. After I made the debit trade, amzn shot up by 20 points blowing past my short call strike by 4 strikes still my position is just break even! May be $5 spread is not good enough for a 1400 a share stock like amzn.
Taylor Oxelgren (6 months ago)
Yea but don't you need the shares to sell the cull?
rodrigo davalos (7 months ago)
Great video, thank you for the clear explanation. I have a question however, What if I buy a call option 6 months out, but three months go by and the stock is down. Can I still do this vertical bull strategy although there's 3 months left until expiration?
Scott Ramsay (7 months ago)
The clearest description of vertical spread I've seen
Mike G (7 months ago)
any advise for the best expiration week to pick if you're day trading these verticals?
Alonzo C (7 months ago)
The thing I don't get is why would anyone trade a raw option? This reduces trading price and limits risk
Eduardo Acevedo (7 months ago)
Hello i like a lot your videos. I just have a question How do you get the breakeven $77.50 min 0:59 for the long call, significant amount.
9SecondStreetMustang (5 months ago)
In this example he bought the $70 strike call and the price of the contract is $7.50. You add the price you paid for the contract to the strike price. $70+$7.50 = $77.50. So the stock needs to go to $77.50 just for you to break even. Anything higher is profit. 1 contract = 100 shares.
Pravin Mistry (7 months ago)
wow! Absolutely awesome explanation of vertical spread. Thank you so much, sir!
T M (8 months ago)
i need to see someone do this live in a video. I've watched this so many times but i don't get it
jay fox (8 months ago)
wait a minute here how can a make 90% profit when I spend 500 on a 450 dollar return?
Chris Szabo (8 months ago)
I’m a little confused when he says we’re going to buy a call option at 7.5 which costs $750 and then we’re going to sell an OTM put at 2.5 for -$250. How is this -$250. The video makes it seem like it’s a free 250 dollars. Because wouldn’t the total cost he $1,000 initially?
michael s (8 months ago)
To Christ, and others: first, there are no puts in this example. You are buying one call and selling one call. Only the strike prices are different. (Yes, it is also possible to do a vertical put spread, which involves buying one put and selling one put, but the example in the video deals with a vertical call spread.) The price of the underlying will either [1] go up significantly, [2 ]go down significantly, or[3] stay about the same. With a vertical call spread, you will make money in conditions 1 and 3, and your losses will be limited in condition 2. Second, you get $250 for the call you sold like this: you sold the call for $2.50 *per share*, multiplied by the number of shares controlled by one contract, which is 100, so 2.50 times 100 equals $250. If the call you sold is not exercised (because it does not hit the strike price), then you would keep the 250 if you hold to expiration. However, you will normally close the spread position before expiration, in which case you will be buying back the call you sold at a lower price and pocketing the difference. The price at which you buy back the unexercised short call depends on what the price of the underlying (stock) does in the meantime. Your broker will caculate all that automatically at the same time as the value of the long call, since you buy and sell them together as a single order (that is, you buy and sell the spread as a unit, not one component at a time). The speaker was trying to keep the details simple so you can grasp the key ideas more easily. I didn't know this would take so much typing!
jay fox (8 months ago)
SO selling an in the money call and buying an out of the money call is a short vertical spread?
Don de Leon (8 months ago)
@2:52 I'm confused. How did you make $250 on the short 80 call @ 2.50 if the stock only got up to $79.50?
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Jigar Patel (9 months ago)
So when trading a Vertical spread, can only choose two different strike prices from either "Call" side or "Put" side?
Colin Casquenette (9 months ago)
Im from canada is thinkorswim in canada too??
Hoang Vu (9 months ago)
I think you have misses an important point. Long and short always cancel out a part of the profit, but never increase the profit altogether. Also, bid and ask price of options always change.
Marat Metoff (9 months ago)
Sky View, why is your commission only $2? What's the secret here?
Merrill Sequeira (10 months ago)
I'm just trying to understand, but if we sell the 80 strike simultaneously, wouldn't we also need to front the capital of 8000 in the margin account, or is it only a fraction of the amount?
Alonzo C (7 months ago)
Merrill Sequeira we are selling the 80 call at 2.50 and because we are selling we get 250 so it decreased the net cost to do the trade.
Narayanan Seshadri (10 months ago)
Thank you for posting a wealth of information in Option trading in a very easy-to-understand presentation. Great job!
Siddhesh Tulaskar (10 months ago)
Any exchange website where I can find option chain for weekly and monthly options?
Ameya Rithe (10 months ago)
At 3:55, I'm not getting why there's a loss of $250 on the Long 70 Call. Can you explain that in more detail? Thanks!
LivingBlast, LLC (10 months ago)
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Sky View Trading (10 months ago)
Wow, he completely copied our video, almost word for word... Thanks so much for pointing that out to us!
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Sportlich Overlord (10 months ago)
good
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Amanda Glosson (10 months ago)
In scenario 4, what happens if the short call is exercised against you?
LITO VALERIO (7 months ago)
You have to buy it back.
William Chang (10 months ago)
do u let these expire just like short vertical spreads?
Ricky Remodo (11 months ago)
There's no error in the video, profit of 90% is correct. Another way to understand it is: you're 1 day from option expiry, the stock price at is $79.5, now you want to close your position, so you need to buy the $80 call which costs you $0, and you have to sell the $70 call, which gives you +$950.
Johnny Mac (11 months ago)
Great video! Thank you!
Renuka * (1 year ago)
in scenario 2 when spot is 75 , why does long call have -250....its still in the money so shudnt it be +ve-profit , also the short 80 y zero as spot is below 80 so shudnt tht too be in profit...plz explain
Renuka * (1 year ago)
ok
Sky View Trading (1 year ago)
At expiration, the option will only be worth it's intrinsic value. So the 70 call will only be worth 5.00 if the stock price is at 75.00. And since we paid 7.50, and it's now at 5.00, we will be -2.50 (-$250) on that leg of the trade.
Aparajith KV (1 year ago)
What is the trading platform you are using?
Sky View Trading (1 year ago)
skyviewtrading.com/preferred-broker/
Event Trading (1 year ago)
Great advice 4 "pick a stock, any stock." The fact that your profits are capped, as well as your losses, is the issue. I suggest placing more emphasis on the Underlying. This means you have to do your homework so that the probability of success is nicely in your favor. One winner can cover ten losers. I use verticals when I'm less certain, straight buys when I'm convinced of direction & time.
Vnam72 (1 year ago)
There is no benefit to trading options over, say, spread betting.  And if the market is random you're just as likely to lose.  You're still betting that the price of the stock will go up or down.  If you keep picking the wrong direction (scenario 3 in the video) then you'll lose money...again and again and again.  That's what happens when you spread bet or do any other form of trading. So, what's the point.
Sky View Trading (1 year ago)
This is just one option strategy of many... and yes, it is a directional strategy. However, most strategies we teach are not directional like this. (Watch our Iron Condor video and/or our other Vertical Spread video where we talk about selling vertical spreads)
Andreas Buis (1 year ago)
My I ask what Software you are using and what your suggestion is for a brocker?
Tim Hammer (4 months ago)
I use E-Trade, and IBD the rest is watching videos I've been trading since 92, be careful trade small $ I only trade very liquid etf's & the spyders, if your platform has a practice platform use it, although you'll see the difference when you have real skin in the game.
Balram Kumar (1 year ago)
One of the best videos on options. ..
damarcuswilson1 (1 year ago)
Do you sell the 7.50 call for the 9.50 or do exercise your contract and flip the stocks?
Melanie Nguyen (1 year ago)
i am sooo lost... can someone explain to me how he get $750 from 70 and 7.50?? I got a dofferent answer when I multiply 70 and 7.50
sam iamdj (1 year ago)
What a well done and easy to understand video. Perhaps the best of it's kind I've watched. Thanks for sharing.
Craig Cox (1 year ago)
SkyViewTrading.. Do you have an "optimal" date range you look for when trading a Long Vertical Spread? 10, 20, 40, 60+ days?
Parag Sathe (1 year ago)
Very good and nice examples.
Del-boy 205 (1 year ago)
Great videos just placed my first vertical spread on tos mobile I-pad but can't find a way to sell the vertical as one transaction. Could you help. Many thanks in advance.
CJ (1 year ago)
Nice video! What program did you use for the graphics?
Steven Ahmson (1 year ago)
Hi, What trading platform do you use?
Delta Gamma (1 year ago)
Great Video but there was small mistake on the videos. On scenario # 1, the profit is not 90% bcoz the original cost was $500 but you don't get the premium of $250 as you have already deducted that amount from $750. :)
Max Leaman (1 year ago)
The net profit also depends on what the underlying stock is at. If it blows past the $80 call you sold you make MAX return which is $1000 or $10 in contract terms, $80call-$70call=$10 profit. so if capital is $500 for the trade you made %100. Also for the downside if it goes BELOW your $70 call you will only get back $250 from the $80call you sold because the $70call would be worthless resulting in a %50 loss.
Maxime Gestels (1 year ago)
sorry but i also think you made that mistake, you bought the long 7.50 so that's $750 + bought the short 2.50 so another $250, so you need $750 for long + $250 for short = $1000 capital requirement ?
Richard Brooks (1 year ago)
At 2:55 does the long 70 call have to drop below 70 in order to exercise the option? The chart doesn't show it dropping below 75 roughly and there's a 9.50 profit? If not, what's stopping a person buying the call option for 70 and selling it right away and making a 5 difference (75-70)?
Wade Tomczyk (1 year ago)
Good stuff
Scott Fatt (1 year ago)
Hi, I enjoyed your video but I just have a few quick questions. In scenario 1 you say that 'at the expiry date' the long 70 call is worth 9.50. My question is how exactly do you manifest that theoretical value into real value? I understand that the call option is worth 9.50 but that is only if someone is willing to buy that call option right? Do people really buy a call option 'at the expiry date'? And if no one is willing to buy it then is that option essentially worthless (that is unless you exercise your right to buy the share at $70 and subsequently sell it at $79.50 meaning that you would in fact own the share for a brief period of time)? Sorry I don't know if that makes sense but hopefully you can clear that up for me. I am from Australia btw. Thanks
Sky View Trading (1 year ago)
Hey Scott, the call will be worth 9.50 because if the call were less than 9.50, you better beliee there would be people willing to buy it at the expiration date because it would be free money (which doesn't exist of course). If the stock is at 79.50, and you could somehow buy the 70 strike call for less than 9.50, then you could acheive a risk free profit immediately... You'd buy the call, let the call turn into long stock, then sell the stock at 79.50. Hope that makes sense. Basically, there WILL be bid on that call option even at the expiration date if it is in-the-money (meaning the stock price is higher than the call option's strike price).
Corey McGovern (1 year ago)
For Scenario 1 on the Vertical Spread when it says: Long 70 Call @7.50 -> 9.50 = +200 Short 80 Call @2.50 -> 0.00 = +250 I understand the first part with the Long Call but how would you make +250 on your short call? If the stock changed only .50 from the strike price of 80.00 wouldn't it +50 on your -250 investment, resulting in -200 for that Short 80 Call? I am probably wrong, just curious! Thank you for the great video though !
Mahmoud Osman (1 year ago)
Hi Corey, I feel in the same exact boat when I was first learning this. The trap people fall into is thinking of shorts in the same way as longs. Remember, with a short, you receive a premium (credit) at whatever the cost (in this scenario it is $250 ($2.50 * 100).) Now... the only way you can lose that money is if the price of the underlying stock is above $80. As long as it stays at or below $80 (rendering the call worthless, $0.00), you keep (or make) the premium (in this case $250) REGARDLESS of how far below the $80 it goes. The call itself has no value whatsoever once it hits $80, which means the person who sold it/shorted it gets to keep the premium. Hope this helps.
FuFill Your ViBes (1 year ago)
whats a good app for beginners?
StewieGriffin12468 (1 year ago)
Your videos are awesome and super helpful for a rookie like me trying to learn. My question is what are the exit choices? Specifically for a bull put and bear call credit spreads. I know that if taking max profit you can let them expire and keep the credit. BUT if the market goes the other way, can you let them simply expire and take a max loss OR do you have sell/but to cover your positions??? Many many thanks!
nick brownlow (9 days ago)
Sky View Trading but if you are exercised wont you have to cover the 100 share price at the current stock price. Like if Spy was 180 isn't that 18000$?
Sky View Trading (1 year ago)
WIth Verticals, you can let them expire OR you can close them as long as BOTH legs are either ITM or OTM. (you can't have one ITM and one OTM). However, we highly recommend just closing all positions prior to expiration if any option is ITM. It keeps things simpler and will also save you money on exercise fees.
Jo mo (1 year ago)
What would happen if you hedged the vertical spread and put more money on the shorts and less on the longs but the market did not cross the shorts, kinda like a reverse iron condor?
Jacob David (1 year ago)
Great videos, great illustrations and examples, and live trading demos. Thank you. Can you explain a little bit slower? Lol. You are talking real fast like on rapid fire round.
Jacob David (1 year ago)
I understand a Call and a Put option and now am learning Vertical spreads. That's a bit harder to grasp if I don't get the basics right. That's why explaining the concept slower would help my brain register these concepts. Or I have to watch this video about 5 times or so to understand every layer of information. Thx.
Sky View Trading (1 year ago)
Thanks. We do explain these concepts much slower and in more detail in our Options Trading Course on our website. The course is over 4 hours so we are able to go into much more detail. Have to keep the videos somewhat short for YouTube, unfortunately! We will do our best in future YouTube videos to slow it down though!
Jason Jackson (1 year ago)
BRILLIANT!!! Thank you so much. I am going to join your course this year!
Sky View Trading (1 year ago)
Awesome, Jason. In the meantime, start with our 3 free video series on our site! Just enter your email at the homepage of the site and you'll be sent 3 free videos. Link to the site in the description! Thanks!
Dr. M&M (1 year ago)
How long does it take to be approved to trade spreads with TD Ameritrrade? Also, don't you have to have a successful track record?
Sky View Trading (1 year ago)
You need to upgrade your account to Tier 2. The process should take just a couple days max. You don't have to have a successful track record but they do look for some other things. Email us via the homepage of our website and we'll give you some tips (link in description).
Ahmad Musa (1 year ago)
If you short a call option wouldn't your stock lose value due to the price of the stock going down, because you would have to buy 100 shares to short? That would mean your max loss is $75*100 - 500 per long vertical spread option. Maybe I'm missing something.
chalemi (1 year ago)
As others seem to be confused about this too.. are you ever at any time actually "owning" the underlying stock? My understanding is, buying options gives me the "right", but not the "obligation" to actually buy the underlying stock. Example: I've purchased "call" options simply by trading the premiums. Is this the same? Thanks.
Sky View Trading (1 year ago)
Nope, we are never actually owning or trading the underlying stock... We are just trading the option contracts. Also, you are correct in your understanding that it gives you the right but not the obligation to buy the underlying stock... SELLING an option, however, means you are SELLING this right to someone else! For this strategy, we are buying 1 option and selling another option (at a different strike). The reason we do this is to eliminate the time decay that will hurt you if you were to simply purchase an option. You'd really benefit from our training course we just launched on our website. The course includes over 4 hours of video content (just like our YouTube vids) teaching options and all the strategies from A-Z.. Check it out!
Lisa Liu (1 year ago)
same thing with the slice at 4:27, the vertical spread return is (250-500)/500=-50%, and single option return is (250-750)/750=-67%.
Lisa Liu (1 year ago)
It doesn't make sense on slice 3:13. You cannot count the profit of short 80 call twice. The profit should be 0. Because you already counted the $250 profit in your initial cost of $500 ($750-$250). So, the return should be 200/500 = 40%.
Sky View Trading (1 year ago)
No, the slide is correct, I promise. We were breaking up the trade into each leg to demonstrate how the trade works. We did not count the profit of the 80 Call twice. The $250 was not factored into the initial cost on this slide because we showed that the cost of the 70 strike call was 7.50... (If we were to factor that into the initial cost, then the cost would have been 5.00, not 7.50).
Ban Nsabin (1 year ago)
Im all messed up with the buy and sell call definitions. I should have probably learnt to trade options before learning stocks. feel like smacking myself for this
Sky View Trading (1 year ago)
No you just need to proper education. Have to walk before you can run. But you CAN learn options first. Check out our site and sign up for our 3 free videos.
Emilio's Journeys (1 year ago)
Great video! I understand about buying the call ATM but when you sell the call is that a naked call sale or a cash secured call? Confused
Bacchus (1 year ago)
Wait but what you to put for the expiration? The first date available? I am obviously new to this please be kind... Thank you...
ScorpXM (1 year ago)
This is the only way to make money using this strategy.
Ricky Remodo (11 months ago)
Hi ScorpXM, do you mean that you only use the vertical spread strategy? (vs. long call/put) Or are you referring to something specific in the comments like exp. dates or something? just wondering i'm a noob
Loyal and Faithful (1 year ago)
i don't see an answer to the following question . . . . .    >>>>>> kingmike40 (2 months ago) . . . . If you sell a call option what happens if the option is exercised?>>>>> Gman Dotcom: hey skyview where is the answer to this question???<<<<<<
Nabil Rezk (1 year ago)
Gman Dotcom you have a put option in this illustration already which will cover your call position!
YAGOONA (1 year ago)
I dont understand how you are selling the short 80 call unless you already own the underlying stock?
Adam Farque (1 year ago)
Alex Ne-k The fact is that you can, man. So the question you should be concerned with is what can happen if the trade goes for you or against you.
Alex Ne-k (1 year ago)
Yea man, but question is how you can sell to someone obligation to sell stocks at certain price when you dont own those stock?
Adam Farque (1 year ago)
Selling the call is as simple as buying one. Whenever you sell the call, you are telling the person who buys it from you "I am contractually obligated to sell you 100 shares of stock at a certain price." And people who think the stock is going up and buy the call you sold are saying "I want to buy the right to buy 100 shares of stock at a certain price." So, you see, the value is in the RIGHT to buy/sell. Think of it like car insurance. You buy a put from your car insurance company every month. If the value of your vehicle goes down (you get in a wreck), then the insurance company will have to pay you the value you agreed upon originally (the strike price). Do you understand?

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