STOCK MARKET BOOKS: 3 in 1 - The Best Beginners Stock Option Guide About How to Become a Professional Trader in Less Than 1 Year With Stock Market for Beginners & Options Trading Crash Course by Livmor Gimm

Author:Livmor, Gimm
Language: eng
Format: epub, pdf
Published: 2022-01-16T16:00:00+00:00

Chapter 5: Introduction to Spreads

In this chapter, we are going to return to the case of looking at strategies that can be used when you are anticipating a unidirectional price movement in the stock. So these are strategies that will be employed when you expect the stock to either move up, or to move down. The purpose of the strategies in this chapter is to mitigate possible losses.

The strategies described in this chapter are more advanced because they will involve selling options as well as buying options. This means that you’re going to have to have a higher trading level in order to utilize these strategies. Most brokers are going to require level III status in order to trade spreads.

There are two ways that spreads can be used. These are called debit and credit spreads. With a debit spread, you have to pay in order to enter the position. A credit spread is a different type of trade. With a credit spread, you are actually using the strategy in order to earn income. Since the main goals used in the strategies are really quite different we are going to consider them in different chapters. It is a simpler transition in thought process to continue thinking about playing the market to take advantage of either an upward trend in stock price or a drop in stock price in order to make profits. It’s also easier to think in terms of buying something to enter the position before considering the possibility of selling something in the marketplace that you don’t own. So for that reason, we are going to talk about debit spreads first.

There are two types of debit spreads. The first type is used in anticipation of an increase in the stock price. This is called a call debit spread. It is also known as a Bull debit spread. You can consider the latter term to be slang because most brokers are going to refer to it as a call debit spread. For that reason, we are going to use that terminology.

Likewise, there is a set up they can be used in anticipation of a declining stock price. This is called a put debit spread. Using slang terms, it could also be known as a bear debit spread. But again, when you are entering these positions you aren’t going to be doing it on the trading floor you are going to be doing it through your broker. And most brokers use the term put debit spread. So we will also use that term to refer to the strategy in this chapter.

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