Trading Long and Short Vertical Spreads
Vertical Option Spreads: More Baggage Than Benefits?
Vertical spreads are a popular way for option buyers to lower their cost, and therefore risk. Likewise, they are often used by option sellers to limit risk and margin. Yet, trading vertical spreads might come with more baggage than benefits. Like any other strategy, there is a time and place for vertical spreads, but in my opinion they should not be the staple of a trading portfolio.
What is a vertical spread?
A vertical spread is an option strategy in which a trader makes the simultaneous purchase and sale of two options of the same type and expiration dates, but different strike prices. The term vertical describes the relationship between the strike prices while inferring the components to the spread share the same underlying contract.
A horizontal option spread, on the other hand, would consist of options in the same market and strike prices, but different expiration dates.