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What are different types of options spreads?

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An option spread is a simultaneous Buy and Sell of options of the same underlying asset. The strike prices and expiration dates are different in such spreads.

Types of Option Spreads are-

  • Vertical spreads- When an option spread is created using Options of same underlying, expiry but of different strike prices, it is called a vertical spread.
  • Horizontal spreads- Also called Calendar spreads, these are created using options of the same underlying, strike prices but different expiration dates.
  • Diagonal spreads- These are created using options of the same underlying but different strike prices and expiration dates.
  • Call spreads- A spread created using only Call options are called Call spreads.
  • Put spreads- A spread created using only Put options are called Put spreads.
  • Bull spreads- An Option spread created to make a profit from an increase in the price of the underlying.
  • Bear spreads- An Option spread created to make a profit from a downward movement in the price of the underlying.
  • Credit spreads- A spread which results in higher premium received than paid i.e. net premium credit is called a credit spread.
  • Debit spreads- A spread which results in higher premium paid than received i.e. net premium debit is called a debit spread.

Option spreads can be entered on a net credit or a net debit. If the premiums of the options sold are higher than the premiums of the options purchased, then a net credit is received when entering the spread. If the opposite is true, then a debit is taken. Spreads that are entered on a debit are known as debit spreads while those entered on a credit are known as credit spreads.

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