Spread options’ trading is a great tool for making money. However, it is profitable if the trader has adequate knowledge and the expertise to do so. There are various types of spread options which are categorized by the relationship between the expiration date and the strike price of the involved options. Here is an explanation of the different types of spread options:
When spreads using the options of the same class are created using the same underlying security and the same expiration month but different strike prices, the spreads are called vertical spreads.
Also known as calendar spreads, horizontal spreads are created when spreads using options of the same strike price, same underlying security but having different expiration dates are used.
When options of the same underlying security but having different expiration dates and at different strike prices are used, diagonal spreads are created.
Bull and Bear Spreads
A bull spread is created when the option spread is created with the intention to make profit on the rise in the price of the underlying security.
Alternatively, when the trader creates a spread option predicting that the prices of the underlying security would come down, it constitutes a bear spread.
Credit and Debit Spreads
Traders can enter the option spreads on a net credit or a net debit. Net credit is received by a trader if the premium of the options purchased is lesser than the premium of the options sold.
On the other hand, if the reverse of the above mentioned situation is true, the trader receives a net debit. Therefore, when spreads are entered on a credit, they are known as credit spreads and those entered on a debit are known as debit spreads.
Therefore, traders can enter the spread betting options’ arena, using any of the type of spreads. However, they should first assess their capability and then put real money.