Verticals and Beyond
Traders who want to take full advantage of all that options have to offer can
do so strategically by trading spreads. Vertical spreads truncate directional
risk compared with strategies like the covered call or single-legged option
trades. They also reduce option-specific risk, as indicated by their lower
gamma, theta, and vega. But lowering risk both in absolute terms and in the
greeks has a trade-off compared with buying options: limited profit
potential. This trade-off can be beneficial, depending on the trader’s
forecast. Debit spreads and credit spreads can be traded interchangeably to
achieve the same goals. When a long (short) call spread is combined with a
long (short) put spread, the product is a box. Chapter 10 describes other
ways vertical spreads can be combined to form positions that achieve
different trading objectives.