When to use option spreads?


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A trader creates an Option spread by simultaneously taking two positions of BUY and SELL of the option of the same underlying asset. The strike price and expiration of the chosen Options are different. Option spreads involving Call options are called Call spread whereas those involving Put Options are called Put spreads.

Option spreads are used to either reduce the capital required in entering a trade or to minimize the risk involved in it. You need to pay a premium to Buy an Option whereas you get premium when you sell an Option. So when you simultaneously Buy and Sell Options, your net investment in the trade will be the difference of premium received and premium paid. Similarly, losses from one position are offset or minimized by gains in other position which helps you to minimize your losses from the entire spread.



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