We have demonstrated how well stock market charts options function
in unison with a stock position. They enhance potential gains,
provide profit protection and limit the risk of the entire investment.
They enable us to manage risk in a single stock as well as an
entire portfolio. But, as good as stock market charts options
are in conjunction with stocks, they can be even better when
traded against each other.
Spreads are strategies that do not involve the use of any security
other than other stock market charts options. Their positives
are that they are inexpensive, offer protection for both buyer
and seller and are in effect automatically hedged trades.
Spreads can provide large percentage returns with low risk and
can be entered into with small capital outlay. A spread involves
the purchase of one option in conjunction with the sale of other
stock market charts options. There are many types of spreads.
Some take advantage of stock market charts options movements
while others are set up to take advantage of movements in implied
volatility and even time decay. There are calendar or time spreads,
diagonal spreads, ratio spreads and also vertical spreads, which
we will discuss in depth here.
Spreads are more advanced and sophisticated than other stock
market charts options strategies. Where certain spreads, like
1 to 1 vertical spreads, can be less risky than a buy-write,
there are more variables to consider and control which makes
trading the spread more complicated.
When you trade a spread you are dealing with three elements:
the spread as a whole (which you can buy or sell) and its component
parts the option you buy and the option you sell.
Although the cost of most spreads is relatively inexpensive
to initiate, they can provide a large percentage return and
there is protection (limits) to both sides of stock market charts
. Therefore, even experienced investors can profit from
learning about spreads and their investment potential.