{"id":964571,"date":"2024-12-09T12:44:56","date_gmt":"2024-12-09T10:44:56","guid":{"rendered":"https:\/\/www.etoro.com\/?page_id=964571"},"modified":"2024-12-09T12:44:58","modified_gmt":"2024-12-09T10:44:58","slug":"spread-vs-options-why-use-each","status":"publish","type":"page","link":"https:\/\/www.etoro.com\/en-us\/academy\/videos\/spread-vs-options-why-use-each\/","title":{"rendered":"Spread vs. Options: Why Use Each"},"content":{"rendered":"\n

Description<\/h2>
When you’re feeling bullish and want to trade options, you can consider buying a single call or a call spread. In this video, we explain the differences between these two options and why sometimes, a more practical strategy could lead you toward a spread.<\/div><\/div>

Transcript<\/h2>
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Want to trade options but looking to risk less money?<\/p>\n\n\n\n

Spreads let you do just that.<\/p>\n\n\n\n

Options are powerful because they let you speculate on price movement using leverage.<\/p>\n\n\n\n

Spreads do the same, but in a more controlled fashion .<\/p>\n\n\n\n

Less risk paired with less reward.<\/p>\n\n\n\n

How is that?<\/p>\n\n\n\n

Well, an option is a contract that, when purchased, gives the owner the right to buy or sell.<\/p>\n\n\n\n

100 units of a stock or ETF at a specific price by a specific date.<\/p>\n\n\n\n

And a spread is at least two options – two contracts: one to buy and one to sell of the very same stock or ETF.<\/p>\n\n\n\n

This combination of buying a more expensive option and selling a less expensive option makes the spread cheaper than a single option.<\/p>\n\n\n\n

Note: credit spreads which involve an initial credit to your account are not offered on eToro. <\/p>\n\n\n\n

We’ll be talking about debit spreads in this video, which involve a debit to your account.<\/p>\n\n\n\n

With debit spreads it costs you money to initially make the trade.<\/p>\n\n\n\n

On eToro options there is both a bullish and bearish spread, just like with calls and puts.<\/p>\n\n\n\n

Let’s compare bullish options with a bullish spread:<\/p>\n\n\n\n

Let’s say you were comparing buying a call option to a bull call spread on, say, a risky tech stock – \u201cToastr\u201d – which manufactures exciting yet kind of uncertain \u201csmart toasters\u201d.<\/p>\n\n\n\n

You think that Toastr is going to go up in price in the next month.<\/p>\n\n\n\n

Here’s the thing: you’re not the only one – many people do.<\/p>\n\n\n\n

And because toastr is a very volatile stock, these factors make the call options very expensive.<\/p>\n\n\n\n

Here’s what you get with a call option:<\/p>\n\n\n\n

Let’s say Toastr goes up and up, past the price you predicted.<\/p>\n\n\n\n

The higher it goes, the more you make, but it going very, very high, well, that isn’t very likely.<\/p>\n\n\n\n

So, let’s say Toastr goes down: <\/p>\n\n\n\n

You can only lose the cost of the premium you paid, but in this case that might be a lot because Toastr is a volatile stock.<\/p>\n\n\n\n

Now, let’s look at a bull call spread on Toastr.<\/p>\n\n\n\n

Let’s say Toastr goes up and up past the price you predicted: you would reap some of the profit.<\/p>\n\n\n\n

The higher it goes, the more you make, but only up to a certain point.<\/p>\n\n\n\n

Let’s say Toastr goes down: just like the call option you would lose the premium paid, but because spreads costless money, you would lose less.<\/p>\n\n\n\n

If you think it’s going to the moon, then a call option may be best. <\/p>\n\n\n\n

But, if you think it’s going to just, maybe the atmosphere, a bull call spread offers you a less expensive way of getting access to that price movement.<\/p>\n\n\n\n

Here’s a pro tip to avoid a common pitfall:<\/p>\n\n\n\n

Many beginning options buyers are seeking to buy inexpensive call options, so they will buy one that’s way out of the money or very close to the expiration date.<\/p>\n\n\n\n

Generally, however, these options are only less expensive because they are extremely risky.<\/p>\n\n\n\n

Spreads offer you a way to spend less money without engaging with riskier out of the money or close to expiration options.<\/p>\n\n\n\n

The trade-off is that you lower your upside, you lower your reward, and your risk.<\/p>\n\n\n\n

We hope this example gives you understanding to consider a bullish option versus spread.<\/p>\n\n\n\n

Check out our other content in the description to learn more.<\/p>\n<\/div>