When purchasing a call option, the underlying stock/ETF must increase in price or the call option will lose value possibly resulting in a 100% loss for your call option trade.
This video will explore the option spread advantages listed below:
1. Increased Profit Potential - A call option spread is created by purchasing a call option and selling a call option with a higher strike price. If you have an existing profit for a call option purchase and leg into an option spread, the spread can typically increase the existing profit potential of an option purchase by 50% to 100% or more.
2. The Option Sale Provides Downside Protection - The sale of a call option results in cash being credited to your brokerage account. This reduces the cost basis of the option purchase and provides downside protection in the event the price of the underlying stock declines in price.
3. Reduces Risk - The sale of a call option results in cash being credited to your brokerage account which can typically reduce the risk of a call option purchase by 30% to 50% or more.
4. Allows You to Maintain Positions During Volatile Markets - The downside protection provided by the sale of a call option to create a spread can help you maintain your spread trade during volatile markets. If you traded option purchases only, volatile price swings in the underlying stock can result in getting stopped out of your directional call option trade.
5. Spreads Can Be Profitable If a Stock Goes Up or Down - Depending on the strike price, option spreads can be profitable if the underlying stock price increases, decreases or remains flat at option expiration.