HOW TO TRADE A SPREAD

THE BASICS
Options are special. They are unlike other investments because they were invented (circa 600 BC) as a tool for reducing and managing risk. In other words, one person (the option buyer) pays for the right to transfer a specific risk to the option seller. The seller charges a fee (premium) and agrees to take on that risk in return for the cash.
Think of put options as being similar to an insurance policy whereby an investor can guarantee the value of a specific investment by purchasing a put option. As a reminder the put owner has the right to sell the underlying asset at a specific price (the strike price) at any time before the put option expires, thereby eliminating any further loss when the stock price is below the strike. That is very similar to how an insurance policy works. (If your house burns to the ground, you can sell it to the insurance company for the insured sum.)
When dealing with call options, in return for paying a premium to buy the option, the buyer gains all upside movement (above the strike price).
The seller accepts the risk of losing a large sum if the stock price surges. For example, if you sell the right to buy 100 shares of a given stock at $50 per share to another investor, then you must deliver that stock if and when the call owner elects to exercise his/her rights. If that stock is trading at $70, you must buy stock at $70 and sell it to the call owner at $50. That is a loss of $2,000 (minus whatever sum you collected when selling the option).
THE SPREAD
it is possible to gain protection against losing a large (essentially unlimited) sum when selling options. The way to do that is to trade a spread, rather than just selling calls or puts. The spread is a hedged (risk-reducing) position. Let's see how it works.
In addition to selling the call option, per above, let's assume that you also buy a call option on the same underlying stock, with the same expiration, but with a strike price of $55 per share.

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 WHY IT IS SO DIFFICULT
It has been documented that on average, individual investors lose money from trading stocks. The majority of losses can be traced to trading expenses. However, those costs do not tell the entire story. Individual investors tend to buy stocks that underperform and sell stocks that outperform the market averages.
A 2011 study looked at day-trader's profits and losses over a 15-year period and included something special: It traced the performance of the best and worst traders over a number of years, trying to discover whether successful trading is a "skill" or a random event. The conclusions: "The top-ranked day traders go on to earn money (after expenses) in the following years and the bottom-ranked day traders continue to lose money... Investor skill is an important feature in financial markets...The results of our analysis suggests that less than 1% of day traders are able to outperform consistently. Trading skill is rare."
He concludes that: "Thinking that you can be in the elite group of performers without substantial deliberate practice and experience is stupid. I know of several day traders who have enjoyed very long careers of consistent success. Every one spends significant screen time absorbing market patterns and working on their craft.
If you accept the evidence that short-term trading requires skills that are not easy to acquire, it becomes logical to ask:
Is there any reason to believe that you and I can do better with options?
ANSWER
I hope the bottom line is clear: A short-term trader in any market must have the ability to consistently predict market direction. Whether your holding period is 5 minutes, 5 hours, or five days, a short-term trader cannot afford to pay commissions unless he/she is accurate enough to come out with some cash -- after expenses are deducted. This remains an elusive skill for the vast majority.
Trading options does not help traders for one very important reason: The bid/ask markets are much wider with options than with stocks. A short-term stock trader can buy a position and sell it for a gain of a few pennies per share. But options are different. If you buy a high-delta, in-the-money call option (and that is the type of option that speculators should buy, in my opinion), the bid ask spread may be forty cents to one dollar wide. Thus, when you buy the option (at a price near the asking price) there is no chance to quickly sell it at a profit when the stock price rallies by those same few pennies. It would take a far larger change in the stock price. Why? Because no one will be willing to pay much above the bid price for your option. When the bid and ask prices are not near each other, any you buy near the ask price, there is no possibility of scalping (buying and selling for a quick profit) with options.
The same is true for spreads. To be able to complete a trade (buy and sell), the option trader must overcome the large price differential in the bid/ask prices. That money-losing phenomenon is known as slippage.
My conclusion: It is far more difficult to make money as a day trader when using options than it is with stocks. 
Don't give up on options 
There is no reason why anyone has to become a day trader. Option strategies can be adopted by traders who have longer time horizons -- perhaps a few weeks to six months. Such strategies include.

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HEDGING WITH OPTIONS

Most investors invest their money in mutual funds or individual stocks. If you take the time to find good stocks that are worth owning, have you ever considered reducing the risk of stock ownership?
We all appreciate the profit potential of investing during a bull market, but as you know, periodic bear markets can be financially and emotionally devastating. There is something you can do about that. You can hedge (reduce the risk of owning) stock. This article describes two simple strategies to do just that.
FIRST, THERE ARE SOME BASIC FACTS THAT YOU MUST UNDERSTAND:
1.       These strategies are not for everyone.
2.      To gain the benefits of reduced risk, there is a cost. That cost can be either: reduced profits, or limited profits. Thus, if your goal is to earn the maximum possible profit from every investment, hedging is not for you.
3.      The strategies do not eliminate all risk. They reduce risk.
STRATEGY ONE: WRITING COVERED CALLS
BENEFITS: Earn profits more often; reduce cost of buying stock.
NEGATIVES: Profits are limited.
THE IDEA: Sell one call option for each 100 shares of stock owned. Use the cash
·         To provide a small cushion that eliminates or reduces losses if the stock price declines.
·         As a steady source of income.
·         To earn profits when the stock price is not rising. The cash premium becomes the profit.
By selling the call, you sacrifice the following:
·         If a rally takes the stock price higher than the strike price when expiration arrives, your selling price for the stock is the strike price. You do not earn any profit above the strike price.
Thus, it is a trade-off: You get cash, but must accept limited profits.

HEDGING: REDUCING RISK WITH SPREADS

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THE FIRST STEP IN MANAGING RISK
One of my basic tenets of investing is the idea that a trader cannot find success without a healthy respect for risk. Therefore learning to manage risk is a mandatory part of any trader's education.
Today, I want to encourage you, the new option trader, to think in terms of hedging whenever you trade. So let's begin with a definition of the term:
Hedge: An investment position intended to partially offset gains or losses from another position. In the options universe such positions are referred to as spreads.
In simple terms, a hedge limits profits and losses. When used properly, trading hedged positions increases your chances of having a profitable trade. 
If you have ever heard anyone use the expression "hedging a bet" this concept is the origin of the expression.
In the options world, a hedge is the combination of two different  positions. Most commonly, one of the positions is bullish and the other is bearish (although there are other risks, besides market direction, that can be hedged).
The resulting hedged position can be:
·         MARKET NEUTRAL. Such positions earn or lose money when the stock market undergoes a significant price change. You can construct the position to profit from the big move. You can also do the opposite: and own a position that earns money when the market is fairly stable and no such large price change occurs.
·         BULLISH. The hedge is created such that the bullish portion of the trade (terminology: bullish leg) is more influential than the bearish leg. That translates into a position that earns money when the stock moves higher.
·         BEARISH. The hedge is created such that the bearish leg is more influential than the bullish leg. That translates into a position that earns money when the stock moves lower.
 Examples
If you are brand new to options, the examples below may not mean anything to you. That's okay for now.
I will explain these spreads in great detail as we progress. For others,
MARKET NEUTRAL: Buy one call and one put; or sell one call and one put with the same expiration. These positions are calls straddles or strangles.
BULLISH: Buy one call and sell another. Both options expire at the same time and the call bought is more expensive than the call sold and is a debit spread. Also: Buy one put and sell another. This time the put sold is more expensive (credit spread).