What are the different types of vertical spreads?

Vertical spreads in Singapore are a great way to take advantage of market fluctuations. Investors can buy and sell the same underlying asset at different prices using vertical spreads. This strategy helps to minimise risk while allowing them to maximise their chances should their predictions regarding future market movements prove correct. This article will discuss different types of vertical spreads that traders can utilise in Singapore.

Bull call spread

A bull call spread is an option spread strategy which involves buying calls at one strike price and selling higher strike calls against it. The objective of this type of spread is for the stock price to rise above the sold call’s strike price, resulting in a net return from the spread. This limits maximum potential gains and losses, as the maximum gain equals the difference between the two strike prices minus the net debit taken to enter the spread.

Bear put spread

A bear put spread, also known as a “long put spread”, involves buying puts at one strike price and selling lower strike puts against it. The objective with this type of strategy is for the stock price to fall below the sold puts strike price which would result in a net gain from the spread. The maximum potential loss for a bear put spread is limited to the initial cost of entering it. In contrast, maximum potential gains are capped at the difference between both strike prices which is less than any premium paid.

Bull put spread

A bull put spread is an option spread strategy which involves buying puts at one strike price and selling lower strike puts against it. The objective with this type of spread is for the stock price to stay within a relatively narrow range so that both options expire and become worthless, resulting in a net gain from the spread. Maximum potential gains are limited to the difference between the two strike prices minus any premium paid. Moreover, maximum potential losses equal the premium paid for entering this spread.

Short straddle

A short straddle is an option spread strategy which involves simultaneously selling a call and put at the same strike price and expiration date. This spread allows traders to take advantage of markets that remain relatively stable over time, as it looks to benefit from time decay in both options premiums. However, maximum potential gains are limited to the total premium received for writing both options. In contrast, maximum potential losses can be substantial depending on how far the stock moves in either direction.

Bear call spread

A bear call spread is an option spread strategy which involves buying calls at one strike price and selling higher strike calls against it. The objective of this type of spread is for the stock price to remain within a relatively narrow range so that both options expire, resulting in a net gain from the spread. Maximum potential gains are limited to the difference between the two strike prices minus any premium paid. On the other hand, maximum losses are equal to the total premium received for writing both options.

Advantages of using vertical spreads when trading options

There are several advantages to using vertical spreads when trading options. Traders should be aware of these before trading to ensure they can make the most of them. These advantages will help traders manage risk more effectively, reduce trading costs and improve the chances of them performing well when trading.

Risk is limited

One of the main advantages of using vertical spreads when trading options is that risk is limited to a maximum amount. It can be beneficial for traders who are unwilling or able to take on excessive risks, as they know exactly how much they may lose if their trades do not turn out as expected.

Lower transaction costs

Vertical spreads also offer lower transaction costs compared to other options strategies. It can benefit traders, especially those with smaller trading accounts, as it enables them to enter into more trades for a lower cost.

Increased probability of making a profit

When entering a vertical spread position, the trader’s potential returns are generally more significant than the maximum potential losses. This increased probability of success can benefit traders looking to maximise their returns on each trade.

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