During a spread both a purchase and a sale of options are made on the same underlying stock but having different strike prices and/or expiration dates.  Both a long and short position are opened simultaneously with this strategy.

 

The two most popular spreads in use are the Bull and Bear Spreads.  With a Bull Spread the greatest profit potential lies with an increase in the security price.  A Bear Spread is just the opposite with the greatest profit lying with a falling price.

 

During a Bear Spread, one option is bought with a lower strike price and at the same time one option is sold at a higher strike price.  Example:  Market price of XYZ is at $45.  You buy 1 call with a strike of $45 and sell a call with a strike of $52.  When the market price increases to $49 the long position has increased in value on almost a point-for-point basis while the short position remains unchanged.  Close both positions at maximum profit...that is...before the short position becomes risky at $52.  Hopefully, time will expire on the short position before this occurs.

 

In a Bear Spread the higher option is gone long and the lesser option is gone short...the opposite of the Bull Spread.  Example:  Market price of XYZ is at $35.  You sell one put at $30 and buy one put at $40.  If the market price decreases the position will

Box Spread -- opening both a bear and bull spread at the

                           same time.  If the price moves significantly in

                           any direction the unprofitable side can be

                           closed out.

 

Credit Spread -- more cash is received than paid out.

 

Debit Spread -- less cash is received than paid out.

 

Calendar Spread -- also called a time spread.

                                 -- Same strike prices but different

                                     expiration dates.

 

Diagonal Spread -- Different strike prices AND expiration

                                    dates.