Option trading strategies with spreads

Meaning of spread
The difference between the current bid and the current ask (in over-the-counter trading) or offered (in exchange trading) of a given security; also called bid/ask spread.

Types of spread
There are 3 types of spread

!ull spreads !ear spreads !utterfly spreads

Bull spread

" bull spread option strategy is used by the option trader who is looking to profit fro# an expected rise in the price of the underlying security.

$ertical bull strategy The vertical bull spread is a vertical spread in which options with a lower striking price are purchased and options with a higher striking price sold.

Types of bull spread

!ull put credit spread !ull call debit spread

Bear spread

" bear spread is an option spread strategy used by the option trader who is expecting the price of the underlying security to fall.

$ertical bear strategy The vertical bear spread is a vertical spread in which options with a lower striking price are sold and options with a higher striking price are purchased.

Types of bear spread

$ertical bear credit spread $ertical bear debit spread

Butterfly spread

The butterfly spread is a neutral strategy that is a co#bination of a bull spread and a bear spread. There are 3striking prices involved in a butterfly spread and it can be constructed using calls or puts.

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