|June 16, 2010
What is a Strategy (continued)
When using options, you employ a strategy, which is simply a
description of which options to buy and sell.
Last time we talked about buying a call spread, in which you buy one
call option and sell another. When a trader buys a call spread,
- The option bought has a lower strike price than
you option sold
What is a 'strike price'?
- Both options have he same expiration date (discussion
When you own a call option, you own the right to buy
100 shares of stock at a specified price.
An example of 'buying a call spread is:
When you own a put option, you have the right to sell 100 shares of
stock at a specified price
That 'specified price' is called the strike
Buy 2 GOOG Sep 550 calls
Sell 2 GOOG Sep 570 calls
Note: You buy the call option with the lower strike price. The call
option sold has the higher strike price.
The call option with the lower strike price always
costs more than the call with the higher strike price. Why? The right
to buy stock at a lower price is more valuable than he right to buy
stock at a higher price. [If this is not understood at this point, we
will get to a discussion soon]
When you buy the more costly option, you pay cash for the spread. Such
trades are referred to as a 'debit spread' because you pay a debit to
When you collect cash for trading a spread, the trade is referred to as
a 'credit spread.'.
Mark D Wolfinger
Expiring Monthly: The Option Traders Journal
Note: I am a partner and contributing editor for Expiring Monthly magazine. We offer special discounts for bivio.com members.