Vertical Spread Trading Tips (ESSENTIAL CONCEPTS)

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The vertical spread options strategies are four of the most basic, yet most powerful options strategies that exist. Additionally, they serve as the building blocks for more complex strategies such as Iron Condors and Butterflies.

The four vertical spreads are the bull call spread, bear call spread, bull put spread, and bear put spread. The bull call spread and bear put spread are classified as "debit spreads," while the bear call spread and bull put spread are classified as "credit spreads."

In this video, I'll cover essential concepts you NEED to understand before trading vertical spreads:

- The relationship between extrinsic value and the profitability of any vertical spread.

- Why debit spreads are NOT low implied volatility trades. In other words, buying spreads in low implied volatility is not necessarily optimal, though it is commonly taught that way.

- The pros and cons of short-term and long-term expiration cycles when trading vertical spreads.

- What to consider when choosing strike prices for debit spreads and credit spreads, with a real demonstration and comparison using the tastytrade trading platform.

- Logic behind taking profits and losses when trading spreads, as well as trade management techniques that can be used with any trading strategy.

Be sure to leave a comment down below with any questions you may have!

=== VERTICAL SPREAD STRATEGY TUTORIALS ===

=== RECOMMENDED VIDEOS/RESOURCES ===

[jhubcapable]

You have such a clear and concise yet thorough manner of explaining a really complex topic. I have been frustrated many times over the last couple years while reading or watching some content and the author or presenter just blatantly leaves a couple sentences out that were key to my understanding haha. You have a natural calming vibe, thanks for all your help and I am sorry ahead of time if I annoy you asking questions in the future. I just stumbled upon projectoption and I am a big fan already no doubt

[Agooo]

Chris: you are the absolute best in explaining options!
I think one conclusion from your presentation is that debit put spreads (DPS) are not mirror images to debit call spreads (DCS).
What I mean is that, if you are buying DPS with bearish assumption, the drop in price of the underlying usually comes with an increase in IV, limiting your gain. When buying DCS with bullish assumption and you are right, the decrease in IV, which usually happens when the underlying rises in value, will greatly increase your reward.
So, when suspecting that a stock has bottomed and will rebound, 1-2 months DCS is a great idea, and you can sell it for profit long before expiration. What should you do on the other hand if you think a stock has peaked? DPS for same expiry doesn't seem to be a good idea.

[yichalnegussie]

I agree this channel is the best
It is very underrated, I thank you for what you doing!!

[sedul]

Thank you for the detailed guidelines around Vertical Spreads.

There are various ways to structure the spread to change the Reward vs. Risk Ratio based on your underlying outlook.

For the Debit Spreads

1) My understanding is Profit Potential can be increased with widening debit spread, but the risk increase due to higher premium paid. And making the spread smaller, i.e. ($1 strike diff), the risk is lower due to smaller debit.

It was also mentioned that as a rule of thumb, the short call would pay for 20% of the Debit required for the long call as a guideline to define the Strike Difference.

What are your thoughts on structuring a debit spread by selecting say 2 OTM (25-40 Delta) Call Options such that the Premium Paid is low versus the Strike Difference? When would you use this versus.

i.e. the Debit is 0.10 cents, and the Strike difference is $1, so your Reward to Risk is 10:1 but you'd only find these if they are rather OTM, so the POP could be much lower.

Essentially this is more lottery ticket like and Binary outcome that you're looking for the underlying to go past the Long Strike price.

2) What are the considerations of selecting a Debit Spread that suits your target price and confidence % of the stock?

Say, Stock is at $10, I think it will have a decent upside move to $15 in the next month with a 80% Confidence.


Are there some website / tools / platform tools that help with determining the best Debit Spread based on that?

3) Long Option (Single Leg) vs Debit Spreads
What are your thoughts of just using Long Options (25-40 Delta) in order to not cap the upside (Call Options), downside (Put Options) from the long run? If you have a good idea that the underlying would explode.

When would you choose one over the other?

[dineshkukreja]

Best Channel by far to learn options trading on Youtube. Highly recommended to go through all videos for holistic understanding!

[saketmulge]

Dude your channel is the best and highly underrated. I hope you gain more subscribers. They don't know what they are missing.

[epgamao]

I like the way you discussed and explained the concepts as I am a beginner, and I appreciate you for that. Nice job, Chris, you seem have all the time to share your knowledge to your audience. Will finish the modules and will open tastyw...later. Forever grateful!

[Edan]

this video really helped solidify my understanding of vertical spreads. I particularly enjoyed the comparison of the ITM, ATM, and OTM spread options.

[enricosaccheggiani]

Explosive video. full of advanced conceps compliments .
Thanks a lot

[Nakameguro]

This video has the most comprehensive explanation of verticals I’ve ever seen! SUBSCRIBED. Especially valuable is extrinsic volatility’s effect on pnl, choosing OTM/ATM/ITM legs, and the last section on handling open positions. I had a question about which of the four vertical spreads to use if I thought IVR was high. But after watching your examples several times, I think I understand. Rather than saying credit spreads when IVR is high and debits when low, I need to compare the extrinsic values. I need to ask myself if I am a net seller or buyer of extrinsic value. Since extrinsic value is fatter near the ATM due to convexity, I need to pay attention to if I am buying or selling that leg. Is this right? (ok, I think the easiest approach is to sum Vegas with a negative sign for selling) Also, what are your favorite books on options (medium to advanced)? Thanks for making this video!

[dustinmartin]

I love your videos man. I have learned soo much information. I really appreciate it! I just recently got interested in reading and I’m glad I found your videos !

[joannelim]

tq, you have a very good & clear grasp of the concepts.

[RajatSharma-jkqj]

Each and everything very nicely explained, thanks a ton man 😊

[eatplayfilm]

Hi Chris, I have been learning a lot from your videos. Based on your experience, which exit plan can minimise the least losses? Thank u. 🤗

[khushboo]

sir pls do not stop :) pls keep putting videos especially live option trades what all to consider before placing trade . thank you sir . love from india :)

[lsw]

Hi Chris, thanks once again for putting up such amazing content as always. Can I request a video explaining how to adjust vertical spreads if the trade goes against you? (Or have you already made such a video already)

[beaugalbraith]

143. Thank you for these insights that I wouldn't have realized on my own.

[StefanoOlla]

Interesting point on trading low IV debit spreads. It is my understanding that this reasoning would apply if you'd keep the position till expiration, am I correct?

Meaning that by buying a monthly call spread with low IV and seeing IV increasing in the first week or so (while still having the stock price rising), we would still have the time value in our favour and the IV would add up to increase the overall extrinsic value of the spread, thus making the trade more profitable.

Am I missing something? Thanks in advance and keep up the good work!

[rubenjimenez]

Very clear....right what I was looking for

[paposwing]

I watched the "Call Option basics" video once, and didn't understand a word. Watched it the second time and understood better. Third time, it began to make sense. Now it's almost clear. That's just me. I want to eventually make a living as a day trader. But I want to fully understand the whole concept and how EXACTLY it works. I will watch every single video until everything becomes second nature. If I can generate $500+ a week by the time I retired, it would be sufficient for me since I always like a simple life.