Wednesday, 27 February 2013

OPTION PLAIN VANILLA V/S SPREAD STRATEGIES

A bull call spread is a type of vertical spread. It contains two calls with the same expiration but different strikes. The strike price of the short call is higher than the strike of the long call, which means this strategy will always require an initial debit. A bear put spread is a type of vertical spread. It consists of buying one put in hopes of profiting from a decline in the underlying stock, and writing another put with the same expiration, but with a lower strike price, as a way to offset some of the cost.
Advantages of strategies......
1.Low Cost: As we buy 1 call(put) and sell the other ,it makes our risk low by decreasing the actual cost.
2.Limited range :If market movement is range bound then these strategies will be more profitable.
Disadvantages of strategies
1.Pure call  or Pure put gives more profit in case of volatility(also with higher cost). If market makes a high upward or downward movement then taking pure call gives more profit rather than going for spread strategies
2.If we take any strategy we have to give  more brokerage as number of positions taken is higher than if we take single call.
 Thus if market movement is more volatile one should take plain vanilla. If market is range bound on upper side go for bull call but if it is range bound on lower side then go for bear put.

2 comments:

  1. Good article given.it is easily understandable

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  2. Nice post .it helped a lot to understand the strategies completely.

    ReplyDelete