There are times when you think the market is going to rise over the next two months, however in the event that the market does not rise, you would like to limit your downside.
One way you could do this is by entering into a spread.
A spread trading strategy involves taking a position in two or more options of the same type, that is, two or more calls or two or more puts.
A spread that is designed to profit if the price goes up is called a bull spread.
The cost of the bull spread is the cost of the option that is purchased, less the cost of the option that is sold.
Broadly, we can have three types of bull spreads:
1. Both calls initially out-of-the-money,
2. One call initially in-the-money and one call initially out-of-the-money, and
3. Both calls initially in-the-money.
The decision about which of the three spreads to undertake depends upon how much risk the investor is willing to take. The most aggressive bull spreads are of type 1. They cost very little to set up, but have a very small probability of giving a high payoff.
One way you could do this is by entering into a spread.
A spread trading strategy involves taking a position in two or more options of the same type, that is, two or more calls or two or more puts.
A spread that is designed to profit if the price goes up is called a bull spread.
The cost of the bull spread is the cost of the option that is purchased, less the cost of the option that is sold.
Broadly, we can have three types of bull spreads:
1. Both calls initially out-of-the-money,
2. One call initially in-the-money and one call initially out-of-the-money, and
3. Both calls initially in-the-money.
The decision about which of the three spreads to undertake depends upon how much risk the investor is willing to take. The most aggressive bull spreads are of type 1. They cost very little to set up, but have a very small probability of giving a high payoff.