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Option Spread Trading

July 17th, 2014

Option spread trading; a form of directional trading considers the direction of the market—and considers it as the most important variable. This form of investing is widely used in methods of spread trading because of the many strategies at one’s disposal to capitalize on regardless if the market goes higher or lower.

When trading for straight long/short trades, you’re on the lookout for a large move in order for you to cover your commissions, trading costs—and to make a profit. But with options spread trading, you can profit even if the expected movement in the underlying stock isn’t large.

For example, let’s say you are optimistic about a biomedical stock, which is trading at $60, and you expect it to rise to $65 within the next three months. You can buy 200 shares at $60, with a possible stop-loss at $58 just in case the stock reverses direction. If option spread reaches its target, you’ll be able to sell for a $1,200 profit (before commissions).

On the other hand, let’s say that you expect stock to only trade up to $62 within the next three months. The strategies behind option spread trading will still provide you with several alternatives to make some money off the hot biomedOption Spread Directional Tradingical stock.

Examples follow:
• If stock goes sideways, spread trading will allow you to sell with a strike price of $60 expiring in three months.
• You can also write two put options (of 100 shares each) and receive a gross profit.
• If stock rises to $62 by the time your options expire in three months, you make a nice gain.
• And, if stock trades below $60, you can buy the shares at $60.

As you can see, buying call options are a great alternative to buying the stock outright. They offer you more flexibility to structure your directional trades. Contact us for more.


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