Best way to trade verticals

Trade Verticals Trade Options SpreadsOne of the most commonly used option strategies known as the Vertical Spread. Looking at it from the context of when and why to use, as well as how volatility will influence its setup and payout.

We are constantly using Vertical Spreads to act on directional biases while also protecting ourselves against a large move in the opposing direction. More than most of our strategies, however, Verticals can require extra attention due to their slightly more complex entry requirements and setup.

Spread strategies could be separated into two categories: call spreads and put spreads. A call spread is any option spread strategy constructed using call options. Similarly, a put spread is any option spread strategy constructed using put options.

The optional way to play credits spreads is to sell Credit Spreads in high Implied Volatility environment and buy buy spreads when Implied Volatility is low.

Setup Vertical Spreads

We show you how to put on a Credit Spread or a Debit Spread by covering the following topics: Direction and IV Environment, Strike Selection and Potential Profit relative to Spread Width.

1. Direction and IV

If the market is at an extreme you might want to trade options so that you can collect option premium. You have decided that you want to use a reduced risk trade. Therefore you choose for an option spread. What spread do you choose under certain market conditions.

Research showed that certain trade works best in High IV environments and others in low IV environment. In the picture below we show what to select in which environment. If you like you can watch a video of the Checklist

 2. How to Setup a Spread

We place the strikes differently for a debit or a credit spread. Where do we place the strike for an optimal setup.

If the stock price is at its top and you are bearish you can sell a call spread. The call spread strategy is created by purchasing one out of the money  and selling one further out of the money call option with the same expiration date.

If you are bullish on a stock and believe it will increase in value within one month. You use a put spread, in which you sell one higher striking in the month put option and buy a lower striking out of the money put option with the same expiration date

 

 

 

 

 

3. Potential Profit

You do not want to pay to much for a position and have still a good probability of profit.

  • when we choose to play debit spread we like to pay less than 1/2 width of the strike.
  • When we sell a credit spread we look for a credit that is 1/3 of the spread width.

 

 

 

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