26 lines
1.7 KiB
Plaintext
26 lines
1.7 KiB
Plaintext
CHAPTER 9
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Vertical Spreads
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Risk—it is the focal point around which all trading revolves. It may seem as
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if profit should be occupying this seat, as most important to trading options,
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but without risk, there would be no profit! As traders, we must always look
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for ways to mitigate, eliminate, preempt, and simply avoid as much risk as
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possible in our pursuit of success without diluting opportunity. Risk must be
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controlled. Trading vertical spreads takes us one step further in this quest.
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The basic strategies discussed in Chapters 4 and 5 have strengths when
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compared with pure linear trading in the equity markets. But they have
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weaknesses, too. Consider the covered call, one of the most popular option
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strategies.
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A covered call is best used as an augmentation to an investment plan. It
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can be used to generate income on an investment holding, as an entrance
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strategy into a stock, or as an exit strategy out of a stock. But from a trading
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perspective, one can often find better ways to trade such a forecast.
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If the forecast on a stock is neutral to moderately bullish, accepting the
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risk of stock ownership is often unwise. There is always the chance that the
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stock could collapse. In many cases, this is an unreasonable risk to assume.
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To some extent, we can make the same case for the long call, short put,
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naked call, and the like. In certain scenarios, each of these basic strategies is
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accompanied with unwanted risks that serve no beneficial purpose to the
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trader but can potentially cause harm. In many situations, a vertical spread
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is a better alternative to these basic spreads. Vertical spreads allow a trader
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to limit potential directional risk, limit theta and vega risk, free up margin,
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and generally manage capital more efficiently. |