Using Simple Spreads To Manage Risks When Investing In Stock Options

Options tend to be more volatile than the underlying equities. The following is a trade that takes advantage of this volatility. This trade will not have unlimited profit potential, but will consistently make a profit. This is a great trade to make just before a news event that will move the market. Instead of trying to out think the market and guess which direction the market is going to move, you position yourself to take advantage of any movement.

This is one of the simplest and most useful option spreads to learn and use. The trader buys a put and a call at the same strike price and the same expiration date. The news report comes out and the stock rallies. The call options increase in value more quickly than the put option declines in value. The trader can close both positions with a net gain.

If the market has a major move, one leg of the spread may go almost to zero, and the other leg will gain more than the combined value of the initial spread. The trader can then close out the winning side, and hold onto the losing leg (which now has little or no value) and if the stock has a retracement, the losing leg may gain some of its losses back, resulting in a gain on both sides.

This trade will not make large gains, but will consistently make small profits. With proper money management, this can be a good trading strategy, and some traders make a living trading only simple spreads.

Some trading firms may lower commissions if both spread strategy is utilized, and both legs are purchased and sold at the same time. It is worth checking with the trading firm as to the cost.

If the market has a major move, one leg of the spread may go almost to zero, and the other leg will gain more than the combined value of the initial spread. The trader can then close out the winning side, and hold onto the losing leg (which now has little or no value) and if the stock has a retracement, the losing leg may gain some of its losses back, resulting in a gain on both sides.

This trade will not make large gains, but will consistently make small profits. With proper money management, this can be a good trading strategy, and some traders make a living trading only simple spreads.

Some trading firms may lower commissions if both spread strategy is utilized, and both legs are purchased and sold at the same time. It is worth checking with the trading firm as to the cost.