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<\/figure>\n\n\n\nWhat are option spreads<\/h2>\n\n\n\n
An option spread<\/strong> is an options strategy that involves buying and selling options at different There are a few different types of option spreads, with a good starting point being vertical spreads. A vertical spread is when the two options involved are of the same type, concern the same underlying asset, and have the same expiry date<\/strong>. So, in our example, there will be spreads that are either both call or put options<\/a>, involve the same stock, and end at the same time. The main thing to note here is that the two options involved in a vertical spread have different strike prices.<\/p>\n\n\n\n Tip: <\/strong>Options spreads are different from bid\/offer spreads which denote the price at which something can be bought and sold.<\/p>\n<\/div><\/div>\n\n\n\n A vertical spread is created when options contracts<\/a> are bought and sold simultaneously<\/strong>. They can be organized into two categories: Debit and Credit. And, of those, you can either purchase<\/em> a bull spread or a bear spread (a debit trade), or sell<\/em> a bull spread or a bear spread (a credit trade).<\/p>\n\n\n\n Tip: <\/strong>All option spreads on eToro are debit spreads, which means you\u2019ll pay for them through your funded account.<\/p>\n<\/div><\/div>\n\n\n\n The main <\/strong>reason <\/strong>you might consider a vertical spread is simple: You have limited loss potential<\/strong>. Because you\u2019re buying one option and selling another, your overall cost is lower. But there\u2019s always a catch. The trade-off is that your profit potential also<\/em> becomes limited.<\/mark><\/p>\n\n\n\n This is also why you might want to consider a spread if you don\u2019t think the stock will make a huge move<\/strong> \u2014<\/em> your profit is limited, but you don\u2019t expect the stock to move all that much anyway, so that might be all you\u2019re looking for.<\/p>\n\n\n\n Let\u2019s say you wanted to invest in the tech company Cisco Systems, Inc..<\/a> Instead of buying the stock directly, you could purchase a call option, which would involve a smaller initial outlay of capital. <\/p>\n\n\n\n But what if you want to risk even less of your money on your options contract? You could turn your investment into a spread (specifically a bull call spread), and sell <\/em>a different call option for CSCO. Taken together, buying one call and selling another would result in the completion of a spread, with the cost of the more expensive call option you bought being partially offset by the call option you sold.<\/p>\n\n\n\n The maximum loss in a bull call spread is the premium you pay<\/strong> \u2014 in this case, the premium of the call you bought, minus the premium of the call you sold.<\/strong> <\/p>\n\n\n\n To calculate the maximum profit you can make from a vertical debit spread, simply multiply the difference between the two strike prices by 100 (remember, options contracts are per 100 shares) and subtract the maximum risk (the difference in premiums). So, to sum up:<\/p>\n\n\n\n No matter where the stock ends up, your result will be between these two numbers. Keep these equations in mind as we move into our examples below.<\/p>\n\n\n\n eToro offers two vertical spreads on the platform: bull call and bear put. Let\u2019s start with bull call spreads.<\/p>\n\n\n\n A bull call spread involves two options transactions:<\/p>\n\n\n\n When you just buy a call option, you have unlimited profit potential. By selling a call option against your purchased call option, the overall cost of your position is reduced, which means there\u2019s less capital at risk. But, as we mentioned before, the trade-off is that this options strategy has limited profit potential. <\/strong><\/p>\n\n\n\n You might use this strategy if you are looking to lower the amount of money you put into your investment or<\/em> if you believe a stock will go up only modestly before the expiry date. If you think the stock is going to go up, but think its upside is limited, a spread can still allow you to benefit from that move while risking less in the cost of the premium. <\/p>\n\n\n\n Let\u2019s go back to that CSCO example \u2014 say you think the stock price is going to go up from its current value of $60, but you\u2019re not sure how much it\u2019s going to go up by. A bull call spread would involve buying one option and selling another.<\/p>\n\n\n\n Buy call option in CSCO<\/strong><\/p>\n\n\n\n Expiry date: 3\/21<\/strong><\/p>\n\n\n\n Strike price: $50<\/strong><\/p>\n\n\n\n Option cost (premium): $1,000<\/strong><\/p>\n\n\n\n Sell call option in CSCO<\/strong><\/p>\n\n\n\n Expiry date: 3\/21<\/strong><\/p>\n\n\n\n Strike price: $70<\/strong><\/p>\n\n\n\n Option cost (premium): $500<\/strong><\/p>\n\n\n\n In this example, you\u2019d pay $1,000 for purchasing the $50 call and you would receive $500 from selling the $70 call option. Your total net debit <\/strong>is $500 from this option spread \u2014 that\u2019s the price of your spread, and your maximum loss*.<\/p>\n\n\n\n Max loss (the net debit) = $1,000 \u2013 $500. This is also the total cost of the spread. <\/strong><\/p>\n\n\n\n If you use the equation we mentioned in the last section, you can also find your maximum profit. <\/p>\n\n\n\n Max profit = (($70 \u2013 $50) x 100) \u2013 ($1,000 \u2013 $500)<\/strong><\/p>\n\n\n\n = ($20 x 100) \u2013 $500<\/strong><\/p>\n\n\n\n = $2,000 \u2013 $500<\/strong><\/p>\n\n\n\n = $1,500<\/strong><\/p>\n\n\n\n Let\u2019s say your If you had just purchased the first call, your profit would be lower. If you had bought just the second call, you wouldn\u2019t have made any profit. By creating a spread, you have capped both your maximum loss and your maximum profit.<\/strong><\/p>\n\n\n\n This spread is basically the reverse of the bull call spread and could be used if you think a stock will drop in value in the future:<\/p>\n\n\n\n The maximum amount you would plan to lose is the amount you paid for the option. Once again, the maximum profit potential is the spread between the two strike prices minus the premium paid. Let\u2019s say you think CSCO may actually decline from $60 in the future. A bear put spread may look like this:<\/p>\n\n\n\n Buy put option in CSCO<\/strong><\/p>\n\n\n\n Expiry date: 3\/21<\/strong><\/p>\n\n\n\n Strike price: $70<\/strong><\/p>\n\n\n\n Option cost (premium): $500<\/strong><\/p>\n\n\n\n Sell put option in CSCO <\/strong><\/p>\n\n\n\n Expiry date: 3\/21<\/strong><\/p>\n\n\n\n Strike price: $40<\/strong><\/p>\n\n\n\n Option cost (premium): $200<\/strong><\/p>\n\n\n\n In this example, the maximum amount you would lose is $300, or the difference between the two premiums (this is also the price of your spread or the \u201cnet debit\u201d)*. The maximum profit would be:<\/p>\n\n\n\n Max profit = (($70 \u2013 $40) x 100) \u2013 $300<\/strong><\/p>\n\n\n\n = ($30 x 100) \u2013 $300<\/strong><\/p>\n\n\n\n = $3,000 \u2013 $300<\/strong><\/p>\n\n\n\n = $2,700<\/strong><\/p>\n\n\n\n If you had just purchased one put in this scenario, your total profit could have been higher. But, you would also be risking a larger investment ($500, as opposed to just $300 with this spread).<\/p>\n\n\n\n Want to start trading spreads? The eToro interface is known for its user-friendly functionality.<\/p>\n\n\n\n Once you find a stock that you\u2019re interested in on the eToro app, click \u201cTrade.\u201d There, you\u2019ll have the choice to invest in a spread. Bear in mind you\u2019ll need to get approval to trade spreads via a margin and options agreement (you should be prompted when you select a spread). <\/p>\n\n\n\n Once you pick the type of option that you want, pick the date you expect the option to move by (the expiry date) and the price past which you expect it to move (the strike price). You\u2019ll also be able to view the risk for the options trade, the bid price (current value), daily change in price, and break even point. <\/p>\n\n\n\n Select the number of contracts you\u2019d like to purchase \u2014 remember, each contract represents 100 shares \u2014 and you\u2019re all set! Once you purchase your spread, you have the option to wait until the expiry date or you can exit the trade ahead of time.<\/p>\n\n\n\n Option spread trading strategies highlight the diversity and flexibility the instruments can bring to investing. The nuanced approach to risk-return might not be for every investor, but, for many, it offers a way to broaden the scope of their investment activity. <\/p>\n\n\n\n Learn more about option spread strategies by joining the eToro Academy<\/a>.<\/p>\n\n\n\n If your analysis suggests that an underlying asset is only likely to experience a modest price move, then, a spread strategy<\/a> could secure a gain while reducing your potential downside. This ties in with the adage that investors should trade the market they see, rather than the one they want to see.<\/p>\n<\/dd><\/div>\n\n\n\n This is quite possibly the case. Options that are further in-the-money tend to have more value and command a higher price. That is why it\u2019s important to carry out a full cost-benefit analysis<\/a> of any trade you are thinking of putting on.<\/p>\n<\/dd><\/div>\n\n\n\n A horizontal spread, sometimes referred to as a calendar spread, is a trading strategy which can be carried out using options or futures. It is where long and short positions in derivatives are simultaneously opened in the same underlying asset and with the same strike prices, but with different expiry dates.<\/p>\n<\/dd><\/div>\n<\/dl>\n\n\n\n\t\tTypes of option spreads<\/h2>\n\n\n\n
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<\/figure>\n\n\n\nHow option spreads work <\/h2>\n\n\n\n
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How to choose an option spread<\/h2>\n\n\n\n
Bull Call Spread<\/h3>\n\n\n\n
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<\/figure>\n\n\n\nBear Put Spread <\/strong><\/h3>\n\n\n\n
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![\"\"](\"https:\/\/www.etoro.com\/wp-content\/uploads\/2023\/06\/BullPutSpread-r3-1024x683.gif\")
<\/figure>\n\n\n\nTrading spreads on eToro<\/h2>\n\n\n\n
Final thoughts<\/h2>\n\n\n\n
Quiz<\/h2>\n\n\n\n
FAQs<\/h2>\n\n\n\n
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