The Best Vertical Spread Option Strategy 2022 - Proven Trading Strategies

All right, so the question is, now that you know about debit spreads, credit spreads. What is the best vertical spread options strategy? Should you trade put spreads, or call spreads, or debit spreads, or credit spreads?

So I want to solve this mystery here in the next few minutes and I want to give you some very specific examples. Right now let's talk about the best vertical spread options strategy, and I want to talk about a very specific example here, I want to talk about an example in Boeing. And I want to define what is it, right?

What market opinion will you have? So let's just go through it step by step. So first of all, a call debit spread means that you're buying a call and at the same point, you are selling one at a higher price.

Let's actually jump to the charts. Let me pull up Boeing here because we will use this as an example. And as you can see right now, Boeing is trading pretty much at $180.

So as I'm recording this video here, Boeing is at $180. OK, now let's say that you want to put on a call debit spread. This would mean that we could buy the $180 call, and you would say so I think that Boeing is going up and at the same time, we would sell a $230 call right here.

So let's actually jump back to this. So what is a call debit spread? We would buy the $180 call and at the same time, we would sell the $230 call.

So, by the way, if you haven't watched the previous video, I'll leave a link in the description here. So this way, you know exactly what that means. I did a video on Call Debit Spread.

And you can watch this video to see it in more detail. But let's talk about the market opinion here. So I want to show you what is the market opinion that we have when we are putting on a spread like this.

Well going back here, we expect the markets, in this case, Boeing to go up, but not dramatically jump up. We don't expect Boeing to go above $230 because otherwise, we wouldn't limit ourselves here. So our market opinion here is that it is going up, but not an explosive move.

Now, let's talk about a put debit spread. And I want to show you exactly what that is. With the put debit spread, we think that the market will go down.

So here, in this case, Boeing we might buy $180 put betting on a falling market, but then we also think that Boeing is not going much lower than $150, let's say. So we expect Boeing to go down. If this is the case, we would put on a put debit spread.

So here we are buying a $180 put, and then at the same time, we are selling a put at a lower strike price. So we would sell a $150 put. OK.

So this is debit spreads. We first buy a call or a put and then we sell another one. Now, let's talk about credit spreads here.

I did a video on this so if you need a refresher of what a credit spread is I'll link to the video in the description, we'll probably create a playlist here or in the comments here you will see this as well. So if we are trading a call credit spread we would sell a call. So, for example, a $230 call, and then at the same time, we would buy a $240 call.

So let's jump to the charts and let me show you exactly what we are doing here. So we would buy the $230 and we would sell the $240. Why would we do this?

Well, first of all, we are receiving a credit. And in this case, we're expecting that Boeing stays below $230. So very important and this is why I'm showing you today what are these different spreads.

So the market opinion here when we are trading a call credit spread is that either we are going down or we are staying sideways. Again, with this particular example here on Boeing, we expect Boeing to maybe even slightly go up, but mainly go sideways or go down, definitely stay below the strike price here. This is very important.

OK. Finally, we also want to talk about a put credit spread. So as an example, and I will actually put these trades on, or I will show you what it means when you are putting the trades on.

So here we could sell a $160 put and at the same time, we would buy a $150 put as protection. Again, if you're a little bit unsure of what credit spreads are I explained in another video so there will be a link in the description here that shows you exactly of how credit spreads work. So what is our market outlook here, our market opinion, or maybe I should just say market outlook.

So here we want to make sure, let me just write it down, so we would sell the $160, we would buy the $150, so in this case, we want Boeing to stay above $160. So our market outlook here is that we are either slightly going up or we're staying sideways. So, as you can see, there are different market outlooks here that you have.

Either you expect the market to go up or down, or you expect it to go down or stay around the same, or up and stay around the same. So it's very important that you first have a market opinion. And this is why I love using, as you know, the PowerX Optimizer, because it tells me which stocks are more likely to go up and which stocks are more likely to go down.

If you want more information about that software I'll link to this in the description. So now let's talk about it. Why would you actually not just trade a call or a put?

Because, you see, if you expect the market to go up, you just could trade a simple call. If you expect the market to go down, you could just trade a simple put. So why does it make sense to mess around with these spreads at all?

Well, first of all, here for the call debit spread by selling an out of the money call, buying a call that is at the money or in the money, and sell an out of the money call, you would reduce cost and therefore, when you're reducing cost, you're also reducing the breakeven. Meaning that you're profitable quicker than just buying a call. The same is true for a put debit spread.

So it is the same reason here you would reduce cost and you would reduce your breakeven so it is quicker to make money on this. Now, on the other hand, why would you trade a call credit spread? Here the idea is, we talked about in the previous video, that some people tell you, "Well, get weekly paychecks.

" Right? So here the idea is to get the premium and at the same time limit your risk. So instead of just selling a call outright where you would have unlimited risk, you are actually buying a call as protection and therefore you limit your risk.

But whenever you first sell an option, whether you either sell a call or you're selling a put the idea here you want to get premium, right? And also here we want to limit our risk. So as you can see, this means, this is the equivalent to buying a call or buying a put.

But then you're adding another element to this. And this is the equivalent of selling a call or selling a put. And as I said it is very dangerous to sell naked calls or naked puts, you're reducing your risk.

Now, before we move on and talk about when do you lose money, is this making sense thus far? Do me a favor if this is making sense click on like really quick and leave a comment that says, "Yes, making sense," because as you can see, we still have a few things to go through. But I want to know from you if I'm going too fast or too slow, if I'm going just right.

And the cool thing about YouTube videos you can watch it again, you can pause and rewind here. But I want to make sure that we are going at the right pace. So if you're enjoying this thus far, click on like.

So let's talk about losing money here. So how could you lose money? Well, again, here with a call debit spread, we expect the market to go up.

So we would be losing money if the market, or in this case Boeing, is going sideways or down. So this is what you don't want to happen. This is how you would be losing money on this one.

Now, here, if we are going sideways or up, this is when you would be losing money because here you're expecting the market to go up, so you lose money when it is going sideways or down. Here you expect the market to go down, so you lose money when it is sideways or up. So here, on the other hand, when do you lose money on a called credit spread?

Well, this is when you lose money if there's a sharp move up, and here you lose money when there's a sharp move down. Let me show you a very specific example because here we talked about we want Boeing to stay above $160. This was for our last example, the put credit spread.

So we want Boeing to stay above $160. If Boeing plummets down to $140, $130, $120, that's when you are losing money. Now, on the other hand, if you have a call credit spread, and again, let me just show you.

So you would actually sell the $230 call and then buy this as a protection. And if Boeing makes a sharp move up to $250, $260, this is how you're losing money. The max risk that you have with a debit spread is the premium that you pay for it.

So let's say that you're paying $1. 70 for it, it's a $170 and that's the maximum that you can lose. Same here, the maximum that you can lose is the premium paid.

Now, here, on the other hand, if you are trading credit spreads, here is your max risk. The max risk is the difference between the strike prices times 100. So here the difference between 230 and 240 is how much?

It's 10, right? And therefore, 10 times 100 is $1,000. So here your maximum risk is $1,000.

Same here. So as you can see, this is true for debit spreads, that the maximum amount that you can lose is the premium that you paid. And for credit spreads, the maximum amount that you can lose is the difference between the strike prices.

In this case, $10 times 100, so it would be $1,000. Still making sense? If so, do me a favor, type in,"Making sense.

" OK. Now let's talk about the max reward. The max reward is exactly opposite.

So here the max reward that you can have on a debit spread is the difference between the strike times 100. So here, what is the difference between these strike prices? It is $50.

$50 times 100 is $5,000, right? So that's it. However, minus the premium that you paid.

OK. You paid something, so it's the difference between the strikes minus the premium paid, and I'll show you a very specific example here in just a moment. Now for a put debit spread, it is exactly the same.

So, on the other hand, what is the max reward for credit spreads? The max reward here is the premium that you received when you sold the call and you bought back the other one. So you made some money, some money got deposited in your account, so the premium received is the maximum that you could get here.

OK, so let's actually take a look at a very specific example here for the trades that we have here. And again, we want to use Boeing here as an example. And I'm jumping onto my TastyWorks account and we are going to Boeing and actually we won't put on the trades, but we'll get ready to submit it so that you see exactly what that means and how much you would risk and how much you would make.

So first of all, here we said we want to buy the $180 call and we want to sell the $230 call. So let's do this. We are buying the $180 call and we are selling the $230 call.

There we go. OK. Let's take a look at the analysis here.

There we go. So, first of all, you see that the margin required is $910. So let's talk about this.

Here the margin required in order to put on the trade is $910. You also see it shows us here what our maximum loss is, and our maximum loss is the premium that we are paying. Right now we would pay $9.

10, options come in one hundred packs so it would be $910. That is our maximum loss. So let's put this in.

Always remember, our max risk is the premium that we paid. Easy enough, isn't it? OK.

So the max reward is the difference between the strike prices, which is $50, right? Minus the premium paid, minus $910, so how much is that? It would be $4,090, $4,090.

Math, it's not an exact science. It actually is. Anyhow, so as you can see, the max profit here is $4,090 because we have a strike price of $50.

So difference between the strike $50 times 100 is $5,000, minus the premium that we paid, minus $910 is $4,090. Is this making sense? OK.

I just thought with specific examples it gets a little bit easier. OK, let's put on a put debit spread. What exactly do we want to do?

We want to buy the $180 put and sell the $150. So we are buying the $180 put and we are selling the $150 put. OK.

Now, surprise-surprise. OK. This does not happen often, but here we have exactly the same risk.

It is $910. OK, this really is a coincidence. Usually, it is a different price.

Anyhow $910 here. So as you can see, this is the margin that is required. It's also our maximum loss, and our maximum profit is $2,090.

Why is this? Well again, it is the difference between the strike prices here, which shows $180 and $150, meaning the difference is 30 times 100 = $3,000, $3,000 minus $910 is $2,090. OK.

And again, the margin required is $910. Okay, so far, so good. Again, coincidence that these are the same numbers, I am surprised myself.

OK, let's get rid of these and let's move on to give you more specific examples here of actual trades that you could put on right now based on the opinion that you have on the market here. So now here we want to sell the $230 call and buy the $240 call. This would be a call credit spread.

So sell $230 and buy $240. So this means that we are receiving $0. 35.

Not a whole lot, right? Again, times 100, so it is $35. As you can see, not really too sexy here.

And this is also our maximum reward. So our premium received, or $35 is the maximum reward. Now how much margin power is required here?

How much buying power? $965. That is what our broker tells us here.

So it's $965, so very similar in terms of margin requirements it is very similar, but take a look at this. The maximum risk here again is the difference between the strike prices, so this is 10 times 100 so it is $1,000, but since we already received $35 as our premium, we keep this regardless. So it is $965.

So $965 here is the maximum risk. Now you already see something very important, here you have a lower risk and you're trying to make twice as much money, or in this example, four times as much money as you risk. Here, on the other hand, you have a very high risk and a small reward.

Now, on the other hand, here, the probability of profit is 94% so it's very high. So it works until it doesn't. And this is why these credit spreads are very, very popular amongst traders because it is winning trade, after winning trade, after winning trade.

But as you can see, you need 20 winning trades and then one losing trade can wipe everything out. So don't fall for the hype where some people say you, "Oh, I have a 95% winning percentage. " Yeah, of course, if you always try to only get $35 risking $965, that can happen.

You need a 95% winning percentage otherwise, it's not profitable at all. Okay. Let's move on to the last one here just so that we can put it on and that you see the differences here.

So now we are talking about a put credit spread so I'm deleting the legs here. And what we want to put on is we want to sell $160 put and buy the $150 put. So we are selling the $160 put.

So sell the $160 and buy the $150 right here. So this is where we get $1. 63 times 100 so it is $163.

So this is already a little bit better here. $163 our margin requirement will be the same as our risk because as you can see, our risk here is 10 times 100 so we are talking about $1,000 here. But since we receive $163 our risk, our maximum loss is capped at $837.

So $837 and this is also the margin requirement. Now as you can see this risk/reward ratio here is slightly better than this one. But as you can also see, our probability of profit went down from 94% to 76%.

Anyhow, so I wanted to make sure that I show you, we're coming back to this spreadsheet here, exactly the differences between all these different spreads. And the question now is which one is the best spread to trade? So if you look at this, call debit spreads and put debit spreads are actually adding one layer or one leg to just simply buying a call and buying a put.

They're reducing your breakeven and they're reducing the cost. And I still like to have this nice risk/reward ratio of risking $910 trying to make $2,090. So I personally prefer trading these debit spreads here over credit spreads.

Because when you're using credit spreads, yes, it is very attractive with a very, very high winning percentage, but as you can see, you're risking way more than you make. Your risk/reward ratio in this case here is what? 1:25?

So you're risking 25 times more, approximately, again, math is not an exact science. It is. Anyhow, and here we are looking at 3/20, so probably a 1:5 risk/reward ratio.

And to me personally, this is not appealing. Now, of course, only you know what's best for you and your account. I just wanted to give you this overview so that you can make an informed decision of which of these these vertical spreads are best for you in your situation.

And I also wanted to show you that you don't fall for this hype where somebody says, "Receive weekly paychecks or receive monthly paychecks. " Yeah, you're receiving $35, and then when you're wrong you might lose $965. Again, this is just one example, there's many examples.

But I hope this helps if it does consider subscribing to this channel because then you get informed whenever I do a new video like this. If you enjoyed this video, you might enjoy other videos of me, but talking about other videos there's probably a few popping up on the screen right now. I recommend that you watch any of these videos and I'll see you in the next video.