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Market Structure

Options strategies (call/put spreads)

June 16, 2021

Option combination strategies

Besides buying or selling single options, there are many other possible strategies that involve positions in multiple options simultaneously, as well as combining options with positions in the underlying assets. While there are infinite combinations possible, we outline one common combination below.

Call spread/Put spread

A call spread (put spread) is a combination that involves buying and selling call (put) options with different strike prices, called a vertical spread, or different expiration dates, called a horizontal or calendar spread. Compared to buying single call or put options, these strategies have more limited profit potential, but they are also cheaper to enter into because of the option premium received from writing options. Based on the direction the investor thinks the price of the underlying asset will move, spreads can be constructed as bullish to benefit from price increases in the underlying assets or as bearish to benefit from price decreases or no move.

Examples

Bull spread

A bull spread with calls involves a combination of a long and short call option with the same expiry, where the strike price of the short call is higher than that of the long call. A bull spread with puts involves a long and short put option, where the strike price of the short put is higher than that of the long put. This strategy works well when an investor is bullish on the market direction and also has an exit level where they are happy to sell.

Bear spread

A bear spread with calls involves a combination of a long and short call option, where the strike price of the long call option is higher than that of the short call option. A bear spread with puts involves a long and short put option, where the strike price of the long put is higher than that of the short put. This strategy works well when an investor is bearish on the market direction.