Options as a Strategic Investment 4th ed. The trader will realize maximum profit if the underlying closes above the short strike on expiration. Purpose[ edit ] Ideally, this strategy should be used when either A the implied volatility of the options expiring in a particular month has recently moved sharply higher and is now beginning to decline, or B the trader believes for whatever reason that the underlying market of the option s will move steadily in his favor during the life of the option. Bull call spread[ edit ] A bull call spread is constructed by buying a call option with a lower strike price K , and selling another call option with a higher strike price. If the bull put spread is done so that both the sold and bought put expire on the same day, it is a vertical credit put spread.

An unequal number of options contracts gives this spread certain unique properties compared to a regular vertical spread.

A typical ratio spread would be where twice as many option contracts are sold, thus forming a ratio. Purpose[ edit ] Ideally, this strategy should be used when either A the implied volatility of the options expiring in a particular month has recently moved sharply higher and is now beginning to decline, or B the trader believes for whatever reason that the underlying market of the option s will move steadily in his favor during the life of the option.

The trader will use call options in this strategy if he believes the underlying market will move steadily higher, and put options if he believes the market will move steadily lower.

In the case of call options, the trader will buy some number of options having striking price X and write sell a larger number of options having striking price Y, where Y is greater than X.

In the case of put options, the trader will buy some number of options having striking price A, but write sell a larger number of options having striking price B, where B is less than A. If constructed using calls, it is a bull call spread alternatively call debit spread. If constructed using puts, it is a bull put spread alternatively put credit spread.

Bull call spread[ edit ] A bull call spread is constructed by buying a call option with a lower strike price Kand selling another call option with a higher strike price. Payoffs from a bull call spread A bull spread can be constructed using two call options.

Often the call with the lower exercise price will be at-the-money while the call with the higher exercise price is out-of-the-money.

Both calls must have the same underlying security and expiration month.

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If the bull call spread is done so that both the sold and bought calls expire on the same day, it is a vertical debit call spread. The trader will realize maximum profit on the trade if the underlying closes above the short strike on expiration.

Jump to navigation Jump to search A Ratio spread is a complex, multileg options position that is a variation of a vertical spread. Like a vertical, the ratio spread involves buying and selling options on the same underlying security with different strike prices and the same expiration date. Unlike a vertical spreada number of option contracts sold is not equal to a number of contracts bought. An unequal number of options contracts gives this spread certain unique properties compared to a regular vertical spread. A typical ratio spread would be where twice as many option contracts are sold, thus forming a ratio.