Main Types of Option Spread Trading - Singapore Forex Trading, Singapore Forex Academy, Singapore Forex Association

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Main Types of Option Spread Trading

Debit Spreads - are when you simultaneously buy a position with a strike price close to the present market price of the underlying stock or whatever - and sell to open for the same expiry date but further away from the current market price. This will take funds from your account and is therefore called a debit spread.

Credit Spreads - these occur when you do the opposite to the above. You sell closer to the current market price of the underlying and buy further 'out of the money'. Since the option prices closer to the money will be more valuable than those further away, you will receive a credit to your account.

Other Spreads - There are more advanced strategies, such as ratio backspreads, range trading spreads like calendar spreads, butterflies and condors - and delta neutral spreads such as straddles and strangles. They are more difficult to explain and each one of them could be the basis for an article in itself.

Option spread trading provides the trader with some powerful advantages over simply 'going long' on an option contract. These advantages give greater flexibility when things go wrong, decrease your cost per trade and allow you to extend the expiration date of your positions (assuming there is sufficient open interest) at little or no greater expense. There are some other things you need to pay attention to, but if understand what you're doing, there is a tremendous amount of money that can be made.