There are two main types of vertical spreads for commodity futures
. There is the vertical call spread and the vertical
put spread. Each spread allows you to do two things. First,
you can buy it, making you long the vertical spread. Second,
you can sell it making you short the vertical spread. Both can
be employed to take advantage of directional commodity futures
options trading plays. When we use the term directional stock
play, we refer to using vertical spreads to capitalize on anticipated
stock movements either up or down.
A bull spread is used when the investor feels that commodity
futures options trading is most likely to go up. As we recall,
bullish means to have a positive outlook on a commodity futures
options trading movement. There are two ways to set up a commodity
futures options trading bull spread. The first is with the use
of calls. In this case, a bullish investor would buy a vertical
call spread (bull call spread). Buying a call with a lower strike
price and selling a call with a higher strike price accomplish
The second way to construct a commodity futures options trading
bull spread is with the use of puts. A bullish investor could
sell a vertical put spread (bull put spread) hoping to profit
from an increase in the commodity futures options trading value.
The investor would sell a put with a higher strike price and
buy a put with a lower strike price. Lets take a look at how
the P&L chart of a Bull Spread looks below.
To recap, if you feel commodity futures options trading will
be increasing in value, you may put on a bull spread by either
buying a vertical call spread (bull call spread) or selling
a vertical put spread (bull put spread)
A commodity futures options trading bear spread, however, is
used when, you the investor, feels a commodity futures options
trading is likely to trade down. Remember, bearish means that
ones outlook on the future movement of the stock is negative.
To take advantage of this expected downward movement, the investor
would put on a commodity futures options trading bear spread.
This can be done in either of two ways.
First, the investor can do it using puts. The purchase of a
vertical commodity futures options trading put spread (bear
put spread) can be accomplished by purchasing a put with a higher
priced strike and selling a put with a lower priced strike.
The second way an investor can construct a bear spread is by
using calls, specifically, by selling a vertical call spread
(bear call spread). You do this by selling a call with a lower
strike price and purchasing a call with a higher strike price.
So if you think that commodity futures options trading is likely
to decrease in value, you sell a vertical call spread (bear
call spread) or purchase a vertical put spread (bear put spread).
Lets take a look at the P&L diagram for a Bear Spread below.