We were recently commenting on the blog about some strategies with financial options. The options market is one of the most dynamic ones due to its nature. Some of the strategies that were described were the Covered Call, the Married Put and the Straddle. These are just some of the many that exist and that allow us to take advantage of and take advantage of that potential that the financial markets offer us. But in this article we will touch on the vertical spreads, in order to "play" with the different strike prices.
In this second part, the intention is to review some more, and delve into those that due to their characteristics can be somewhat more complicated. Because it is advisable to follow the order of the articles, going through the one of the Financial Options, and then continue through the first part of Strategies with Options until you get here. At this point, I hope that the new strategies that we are going to see will also be didactic and useful for you.
Bull Call Spread
This strategy is included within the vertical spreads. It consists of simultaneously buying and selling two call options for the same asset and the same expiration date, but with different strike prices. The purchase is made on the lowest strike price and the sale on the highest strike price. This options strategy is implemented when the investor is bullish on an asset.
Both loss and gain are limited, and they will depend on the distance at which we place the strike prices. In situations where there is great volatility on an asset, there are often opportunities with an interesting benefit / risk.
Bear Call Spread
It is the same as the previous strategy, except that in this strategy the sold call is the one with the lowest strike price, and the bought call is the one with the highest strike price.
Bear Put Spread
The Bear Put Spread strategy is similar to the previous one, only this time it is applied when the investor considers that there may be decreases in the asset. The objective is to take advantage of the drops by limiting the losses and limiting the gains. For it a Put is bought and another is sold simultaneously on the same maturity and asset, but with a different exercise price. The bought put is the one with the highest strike price and the sold put the one with the lowest strike price.
The maximum profit that can be aspired to is the price difference between the two exercise prices minus the difference between the premium paid and the premium collected. On the other hand, the maximum losses are the difference between the premium paid and the premium collected.
Bull Put Spread
On the other hand, and in the same vein, we can reverse the buy and sell order within the previous strategy. So with the bull put spread, the Put with the highest strike price would be sold, and another would be bought with a lower exercise price. In this way, we would start at "profit" and only if the price decreased would we enter into losses, which would be limited by buying the put at a lower strike price.
Iron Condor Strategy
This strategy is one of the most advanced in the options market within vertical spreads. It is generated thanks to four options, two calls and two put. Its Delta is neutral and the Theta is positive, that is, it is not affected by price changes within the range in which it works. However, what is very positive for her is the time factor, since it increases our benefits. In the same way, if we have entered a time of high volatility, and the later it goes down, reducing the price of the options even more, it is something that ends up benefiting.
To put it into practice, all the options must be on the same expiration date. Then, taking into account that the first strike price is the lowest and the last the highest (TO it is composed as follows.
- A. Purchase of a Put with strike price A (the lower one).
- B. Sell a Put with a B strike price (somewhat higher).
- C. Sale of a Call with an exercise price C (higher).
- D. Buying a Call with a D strike price (the highest).
In fact, this strategy is the combination of a Bear Call Spread and a Bull Put Spread. During a range that will depend on the distance from the strike prices we will be in profit. Only if the price rises or falls beyond our positions would we enter into losses, although they would be limited by the purchases we made.
Reverse Iron Condor
Es the combination of a Bull Call Spread plus a Bear Put Spread. The order to be followed in the purchases and sales of the 4 options is completely the opposite. Initially we would "start" in losses, which would remain within the range where we would have made our purchases. As the price exited this zone and rose or fell, the gains would materialize.
In the inverse Iron Condor the potential gains are higher, however they are also less likely since we start from losses, and in the event of little price variations these gains would not be achieved.
Conclusions about vertical spreads
Vertical spread strategies tend to give good results if the price of the assets behave as investors expect. Being a combination of 2 or more options, it may be possible that there are confusion when trading options. For example, let's end up buying instead of making the sale. Many brokers offer the possibility of observe the graph resulting from our strategies before trading, that helps us to see if it is what we want. In addition, they allow us to see returns / risk and probabilities that we will reach maximum profits or losses.
My recommendation is that you take some time in analyze operations well, so they can be optimized, minimize standard errors and maximize potential profits and minimize losses. I hope this article has helped you to familiarize yourself with vertical spreads strategies with options!
