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When to use option spreads?


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A trader creates an option spread by simultaneously taking two positions BUY and SELL of the option on the same underlying asset. The strike price and expiration of the selected options may be different. Option spreads with call options are called Call spreads, while those with put options are called Put spreads.

Option spreads are used to either reduce the capital required to enter into a trade or to minimize the associated risk. You have to pay a premium to buy an option, while you receive a premium when you sell an option. So if you buy and sell options at the same time, your net investment in the trade is the difference between the premium received and the premium paid. Similarly, losses from one position are offset or minimized by gains from the other position, so you can minimize your losses from the entire spread.



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