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Intro to Vertical Spreads with Randall Liss

8/08/14 2:52 PM EDT
Randall Liss explains the downfall of buying and selling options outright and how he uses vertical spreads to put on positions. In selling an option outright, the most you can make is the premium received, but you expose yourself to unlimited downside. In buying an option outright, timing is critical due to the negative effect of time decay. Therefore, Liss advocates for spread positions, the simplest being the vertical spread. An example of a vertical spread would be a case in which a 90 call sells for $8 and a 100 call sells for $2. By buying a 90 call and selling a 100 call, you would be taking on a position for a basis of $6 (the difference between $8 and $2), and this $6 would be the maximum amount you could lose. The most the spread can be worth is $10, because you will have the right to buy at $90, and will have to sell at $100. The least it can be worth is $0, and so you are risking $6 to make $4. The converse of this call spread would be a put spread, in which you do the same thing except for adjacent put options. Liss explains why a put spread produces the same risk parameters as a call spread, but because you are receiving payment upfront as opposed to outlaying the payment, he prefers this position known as a credit strategy as opposed to a debit strategy.
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