Trading Options: Bull Call Spread (Vertical Spread Strategy)
★ SUMMARY ★
Hey! It’s Sasha Evdakov founder of Rise2Learn and in this video I want to share with you how to trade options more specifically, the vertical spread.
The vertical spreads are fantastic option spreads to trade when you're looking to trade out larger dollar stocks because it allows you to use less capital for trading those bigger stock.
First I want to show you the diagram behind what it looks like in a simplified version and i want to show you on the charts exactly what you're looking for. So before we get into them vertical spread i want to talk about the regular call spread first of this is called a profit picture if you've never seen one before and a regular call spread you have one call that you're purchasing and you're looking for a directional bet to the upside.
Posted at: http://tradersfly.com/2014/03/option-strategies-bull-call-spread-vertical-spread-strategy/
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+jay fox this kind of is a personal preference because it also comes down to market conditions. It really just depends how the market is moving and also on the volatility. The more time that you have the wider you can get for the same probability of success. So in other words for some people they like to play tighter contract because they expire quicker and other people prefer to go out more in time because you can capture more premium. It's just a matter of preference and really comes down to how the market is moving as well as the volatility within the market.
So say I want to rotate between Bear Call Spreads and Bull Put Spreads, selling the open and buying to close a little further out. Would it be viable to choose strike prices at 90% OTM or roughly 5-10% Delta? Mostly for trading indices. I've seen some traders say do around 70% OTM for higher premiums but also a little riskier that the stock jumps or drops during the duration of that months contract.
hi Sasha, what trading platform do you recommend. Also, is the following statement correct "for iron condor, the max loss of the upper leg is the difference between the two upper strike, whereas the max loss of the lower leg is the difference between the two lower strike" ? I'm confused on this. thank you
+Huy Vu the max loss will be whichever side is the largest. That is what they margin you on the account since price can only be on one side or in one spot during an iron Condor. So whatever the largest losses on a certain side either the call side or the put side that is what you'll get margined out on. Ask for platforms that's just a personal taste just like buying a car. Personally I recommend something like an easy user interface and good customer support for most people like think or swim or even tastyworks. The fact is is later on you can always switch platforms if you're looking to save on the fees but the customer service at the beginning will be valuable to a new Trader
Thanks for the response, I rolled 1 month out for a slightly higher debit. I feel positive with this trade, I will make a little less but I just didn't want to take the loss and think it will go through my short
It depends on when you put it on initially, your risk levels, what are the alternatives, what was your plan earlier, etc... it could be if its going against you... it could be wise to just get out and make it up the next month... lots of variations depending on what you want to do and your current setup. Because if you got in it only 2 weeks earlier... it may not be... if you got in it 5 weeks ago - it might be... depends how things look...
+Thomas Kwoba well in this case you would get out of the position by taking a loss if it went against you. In order to get out of it he would just do the opposite of the trade. But in this case of course it would be a loss if it's going against you. Weekly's are basically like options with rocket fuel. Sometimes they can explode you to the upside and make you a lot of money and other times you can get a blow up catastrophic event just like you did with some space shuttles and Rockets.
I've only trade stocks, the think that is not very clear in options is that I could setup a vertical spread creating buy and sell call contracts, but what if only one of them is sold and the other is kept open. On every video it seems that all option contracts are under the assumption that they will always be sold, which doesn't seem like reality. Am I correct to assume that you have to create attractive contracts so ppl will actual buy them or anything sells?
+Marcus Coelho typically if you are selling them in a batch like a vertical spread then they would get sold together and it's not as if you would get filled on one and not the other. If however you are doing them individually and putting the order in as a single order meaning that you are doing two orders in that case then yes you may get filled on one and not the other. So that's why when you are putting in a spread or looking to create a spread in the future it is best to enter the order as a spread rather than single individual contracts. However typically what I find is that if you are trading liquid vehicles and liquid options you usually don't have problems with getting filled so long as that the price level you are asking for is reasonable.
You can, but things in the money are usually less liquid, fill rates are worse, and it is usually not ideal.... you are paying a higher premium. In other words - its kind of like wasting money. This is not always the case, but it is not standard practice.
hey very nice and helpful video can you please tell me the name of the trading platform or software you are using in the video ? or suggest me some free platforms to practice derivatives on? p.s - have subscribed keep up the good work !
Thank you so much. The software is Thinkorswim and then I use TC2000 by Worden for charting. Check the resources tab on the site for other additional resources - you can also see freestockcharts for the free version.
When putting on a Bull or Bear Call Spread are you required to own at least 100 shares for the call you wrote? Also, when putting on a Bull or Bear Put Spread, should you have enough money in your account to purchase shares for the put you sold?
I'm a bit confused. a vertical call spread means that you will buy one call and sell one call. I get that. However how is your risk defined if the stock crashes to zero? i mean, when you buy a call, i thought you can only buy the stock if it goes above a certain strike price, not below...right(which would be buying a protective put).
also, is it okay to just let the options expire?
+Sasha Evdakov (TradersFly) let me clarify. what happens if yoi have a bullish spread and the stock crashes by lets say 50 percent. can you describe what events happen?..would the call that you purchsed ger exercised automatically to protect your assets?
I am a bit confused by your question, but Yes you can let the options expire. Verticals require 2 contracts. You can create verticals on Calls or verticals with puts. You can put them on regardless of where the stock price is - it will just cost you more or less.
when you sell the out of the money call instantaneously you receive a premium for selling the contract. The buyer looses money daily as a result of the contracts theta decay. How are you earning additional income from the theta decay, when you already received the premium when you sold the option :s?
You do not earn additional money from theta decay on its own. However you are making it from the delta depending on the move in the stock and the theta. Otherwise if you just bought it in one day and sold it the next day - you would not make the full amount you sold it at since your options haven't had a chance to decay much yet.
Thanks. What I am confused about, is when I sell a call spread out of the money, there is a big margin for small profit. If I check on deep in the money spreads, one I found was zero loss (no margin) and $5 dollar credit. SPX at this week at 2000 sell, 2005 buy.
The other thing is when I sell out of the money, the thing to watch out for is the stock not going above the sell price.
But in ITM isn't this a problem, with the itm at sell spx 2000, buy 2005 TOS shows, "no loss" and $5.00 credit. Since spx is already above the sell price, isn't this a problem, like when I am selling OTM? Why does there seem to be a difference.
I can't find discussions on these issues.
A $5 credit with "no loss", seems I could do it all the time. What happens when assigned?
nice video. if you own a stock but its deep in red. can you buy call and sell x2 the number of contract you buy increase you potential profit even more. and in same ticker you buy put and sell lower price 2x the number put bought. This way you are A. doing for credit. B. reaping higher return. C. winning no mater what happens. What you think?
+Austin Weiss You don't need to own a call to sell a call.... you can sell a house you don’t own yet (one that is being built). Similar to a car that is not on the lot (it will be made custom for you). In stocks you can sell a call without owning it first.
Hey, I'm trying to grasp options concepts, could you answer a quick question? If I set up a bullish put or call spread, and the stock price dips below my sold put contract, what would happen if the person you bought my contract decided to exercise the option early before the expiration date? Does this happen? Would I be out of luck since the broker would exercise my bought option to cover?
+Sasha Evdakov (TradersFly) "you mentioned bullish put spread (not sure what you mean by this)"
The strategy the poster is talking about is called a Bull Put Spread. It's simply a bullish trade using puts. The idea being that the price of the underlying is higher than the puts you sell at expiration..
+Evan W Yeah but since you have a SPREAD (I assume vertical) the other side would get executed... you mentioned bullish put spread (not sure what you mean by this) but if you have a bullish vertical (calls) or bearish vertical (puts) then yes the other side would be executed to protect you...
+arm239 That depends on the strategy you are looking to do.... you can do a spread that is way out of the money or deep in the money... these two strategies would have different advantages and disadvantages - the answer is not as simple as "this one".
+Steve Kaldi Good point - vertical over a call for example has less loss on your theta or price option. It has a more neutral vega as well. Often times stocks don't go up forever so a call in theory is disney world for most people... so even if you cap your potential earnings like in a vertical it gives you other advantages such as less theta loss and better vega. In addition if you do SELLING of options - it limits your loss if you are selling a vertical rather than selling an option can leave you with unlimited risk
Thanks for the video, helped me out a lot.
Although I do have a question: If the stocks price rises above (through) the roof of the capped profits from the short call option. Wouldn't the buyer be able to exercise that option and therefore putting the seller (me) at risk for an even bigger loss?
+Dan Pak In part you are true, but your other side would be executed automatically (with most brokers) and you would exercise that side. I had assignment on a handful of times and you don't have to do anything most of the time. It is really just rather than having white iphone you get a black iphone.... the difference is the color and how the transaction happens, but the value would be nearly the same. That is why you do the vertical. If you did a single call then you would be in way bigger trouble of course.
im a little confused on if i should close out call before expiration or let it expire on its own. I just set a trade for facebook and stock price was 76.00 at time of purchase, i bought dec 20 75 call and sold dec 20 77.50 call. this cost me 1,014 and my profit should be 814. it expires in 14 days. so if i get to my 814 profit in 10 days, can i sell or do i need to wait for expiration? if i get to 500 profit and i want to close out trade can i do that without losing any money? your help would greatly be appreciated. Ive always done straight calls or puts.
+Omar Ramos Calls on their own you normally need to close them out. If it’s a vertical spread it’s a bit different. However, with calls or puts you have the risk of assignment depending on your position and the stock price. Most traders try to get out the 5-10 days before the expiration day to avoid getting pinned on the stock.
You seem to be using the words "premium" and "theta decay" interchangeably. I'm confused (newbie). Isn't theta just the decay in the option value as time diminishes towards expiry? and premium refers to the cost of purchasing the option...which is the same thing as your max loss (your risk)?
+Freddy Rodriguez Unfortunately words are never the best way to communicate versus showing someone, but I will do my best. Theta decay is how fast an option deteriorates. Premium (in the way I am using) it is yes theta decay in this video as it is the amount I'm receiving from an option decay. So in this video to simplify things if I could go back I would use the words "the money you make each day from an option losing value" ….. and "the amount it costs or what I paid to purchase an option." Sadly using the word premium made it confusing, but easier to speak.
+jasonc_tutorials You would normally want to take the spread off before expiration. You could just let the whole thing expire if you are in profitable territory otherwise you will continue to lose money daily based on your theta... If you are in the safe zone then each day the stock doesn't move you will continue to make money (again based on your theta). However, normally you want to close out your position before expiration - if not then you have assignment risk which happened to me last month actually but it all works out since it auto executes your short and your long at the same time.
Technically no you don't have to own the stock. You can sell naked calls and puts..in other words you don't own the underlying stock. However, if you have never traded options before this is very risky and your brokerage would most likely not grant you that level of trading privileges.
+Tristan Marroquin Manage and let them expire if it works... most of the time stocks don't run up forever or you wont make an infinite amount on call spreads (even though people like them because you have unlimited upside). In general I sell into strength a few vertical spreads as the stock moves higher... but if it is close to expiration and the risk is low I may let them expire...
Great Video! If the stock goes beyond your Sell Call. Couldnt the buyer exervises the option and your loss would be substantial? I don't see how the only risk is the call you bought. If the strategy goes to plan do you just let everything expire or do you sell the call before expiration. Thanks .
+Kevin Murray You can sell things prior to expiration... or you can let them expire and save on commission. You are only at risk on expiration if your value is really around .07 cents on your short option. This is when people may want to exercise the option right. However... for bull call spread you have a short and a long so you are protected on the difference of the two.
Yes, I understand your point. Adjustments would be nice and something we can touch on in the future lightly, but they are tough to cover in less than 10 minutes. This might be better for a different video or a course.
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