To generate consistent cash-flow from the trading markets with out having to ‘guess’ or know near term market direction, there are a variety of different option techniques that option investors can use.
For example there is the butterfly spread, the iron condor , the diagonal (an/or the double diagonal), and the calendar spread, the double calendar spread – and, the vertical spread, which is sometimes also referred to as the credit spread.
The vertical spread (or credit spread) is a foundational trade that can be found in many other option income strategies. The iron condor spread is in actuality just two vertical spreads placed on either side of where the market is trading.
It is also a basic building block of the butterfly spread. The top half of the butterfly spread is actually just a vertical spread – as is the bottom half. An iron butterfly trade is built from a put vertical spread and a call vertical spread.
Vertical spreads can be used with both put and call options. A bearish vertical is called a bear call spread, which is placed using calls above where the underlying vehicle is currently trading at. A bullish play is called a bull put spread, which is a vertical spread using puts placed below where the stock or index being used is trading at.
Following is an illustration of a bull put vertical spread…
Sell 5 RIMM 50 Call Purchase 5 RIMM 50 Call
The vertical spread in the example above is a bearish position. Our hypothetical trader who placed this trade believed that RIMM would be moving lower – or staying in it’s general vicinity on the chart.
Even though the position in the example uses call options, it is a bearish position since it is constructed in such a way to be profitable if the stock being used (RIMM) heads down, or stays in the general area of where it is currently trading at.
As long as the outlook on this trade is correct and RIMM stays where it is at or heads downwards, this trade will ‘win’ and the initial credit received when the trade was first placed will become the profit. Also keep in mind that this strategy can be used with both call options and put options at the same to build what is called an iron condor trade.
Looking for step by step instructions on how to trade the iron condor, then visit www.ironcondoroptiontradingstrategy.com to learn this strategy as well as the iron condor option strategy.