Options Trading Mastery: Understanding Spread Prices
Topics: options trading, options trading strategies, stock options trading, stock trading1
During the life of a vertical call spread, the spread will trade between its minimum and maximum values (between 0 and the difference between the two strikes). In the case of a vertical call spread, the spread will trade closer to zero when the stock trades closer to or lower than the lower strike price. The spread will trade closer to maximum value when the stock trades closer to or higher than the higher strike price.
Starting from a stock price of 37.5, a price located directly between the two strikes, (using our example of the August 35 - 40 call spread) we can see the approximate value of the spread is roughly $2.5 dollars. This is because the August 35 calls and the August 40 calls are equidistant from the current stock price of $37.50. Being equidistant from the stock, both the August 35 and 40 calls will have almost the same amount of extrinsic value in them. Thus, in the spread, the extrinsic values of the two options cancel themselves out since you are long one call and short the other. This would leave each option value consisting of only intrinsic value. With the stock at $37.50 the value of the August 35 - 40 call spread will be $2.50. The August 35 calls will have $2.50 in intrinsic value while the August 40 calls will have $0 in intrinsic value. The difference gives you a spread with a value of $2.50.
A general rule of thumb is: if the stock price is located evenly between the two strike prices, the vertical spread should be worth roughly half of the value of the distance between the two strikes. This will be true for vertical put spreads as well as call spreads. From this rule, we can roughly estimate the vertical spread’s price per different stock prices.
For vertical call spreads, if the spread is worth roughly half of the difference between the two strikes with the stock price directly between the two strikes, then as the stock falls to lower strike and beyond, the spreads value will decrease and move closer to $0. Time left until expiration and volatility will dictate how close and how quickly it will approach $0. On the other side, as the stock climbs toward and above the upper strike, the spreads value will increase toward its maximum value described by the difference between the two strikes.
For vertical put spreads, as the stock price decreases toward the lower strike price, the spread will increase in value and approach its maximum value as defined by the difference between the two strikes. As the stock price increases toward the higher strike, the spread will decrease in value and will approach $0. Again, time until expiration and volatility will determine how quickly and how close the spread will approach $0.
Ron Ianieri is currently Chief Options Strategist at The Options University, an educational company that teaches investors how to make consistent profits using options while limiting risk. For more information please contact The Options University at www.optionsuniversity.com or 866-561-8227
Previous Articles Highlighter:
Lake Erie Walleye Fishing Charters To Choose From (1)
Another reputable Lake Erie fishing charter is JTCharters. Lake Erie Fishing Charters, Captain Tucholski and crew have a proven success record of providing anglers with satisfying charter trips on Lake Erie to catch walleye, small mouth bass, and perch.
Motor Home Vacations: Oregon's Untouched Nature (2)
Not only do you have the majestic Cascades towering on all sides, you are just minutes away from some of the best salmon and trout fishing in the entire world!
Hazy Photos Call For A Camera Lens Filter (3)
No you don't have to break your wallet and buy every gadget out there, but you should at least become familiar with the different types of camera lenses and lens filters.
What Are The Highland Games (4)
The Highland games have their origin in the 11th century when Scotland's King Malcolm III urged contestants to participate in a foot race, in order to recruit the most perfect men at arms for his army.
How To Shop For Wine Refrigerators (5)
They are available in various sizes, shapes and models, so you can find one that is perfectly suited to you and your particular needs. Your wine refreigerator will work wonderfully by keeping your wine chilled until you are ready to serve it.
RFID Solutions For Field Service (6)
Topics: RFID, RFID Solutions, GAORFID Organizations employing fieldworkers all have business influences such as worker productivity, customer service and cost reduction that flow directly to the bottom line profitability of the business.
Who Needs The Acne Laser Skin Treatment? (7)
Results vary from one patient to another, and so if you know someone that has already gone in and had the procedure done, you can use their results as an example, but remember that your results may not be the same.
What Does Age Have To Do With Learning A Foreign Language? (8)
Unfortunately, when I ask them where they got their information, they don't have an answer. They don't know where they heard it but they are convinced it's true. Perhaps if they knew of a study in 2001 by the Foreign Service Institute which found that adults have an advantage in becoming bilingual, they would change their minds.
How To Find Cheap Plus Size Swimwear (9)
The fabric should dry quickly after a dip in the pool, but also offer enough cover to prevent sunburn and other skin damage. Where To Buy Cheap Plus Size Swimwear Depending upon when you need your swimwear, or how far in advance of the season you shop, there are many places to shop.
My Weekend Camping Trip And My Birkenstock Sandals (10)
It's pretty cool to be camping out and still eating a juicy marinated ribeye! Even while I was enjoying the taste of the steak and the company of my girl the itch on my ankle was starting to bug me.
Newer Articles Highlighter:
Shopping For Furniture At Outlets (1)
The discounted prices offered on those furniture items are marked even lower and furniture outlet operators take advantage of these prices and buy furniture for many areas of the home in large quantities.
Louisiana Estate Planning Is Not The Same As Other States (2)
They own the property and have full usage rights. If the parents are no longer living, everything goes to the deceased's siblings. Without a will, your accumulated wealth and possessions do not go to your spouse, except for purchases made together during your married life.
Different Types Of NHL Merchandise (3)
You can find things such as NHL jerseys in kids sizes too now and there are many different t - shirts that have been designed especially for women. Caps and hats have become quite popular over recent years because not only can people wear them to games but it has also become trendy to wear them for everyday use.
Targeting Perfection With Six Sigma (4)
You may end up with bad process with the latest technology. Don't Be Afraid Of Experimenting - The methodologies and tools of Six Sigma that are usually prescribed are not words set in stone.
Real Estate Buying Tips For Your New Home (5)
The first step in the house buying process is to find a realtor with whom you are confident and comfortable. Your real estate agent should be someone knowledgeable about the area.
A Day At The Tennis Court (6)
This is because everyone has a good time playing a game of tennis and spending some time talking to friends during each game that is played. A lot of people play tennis every day and have a great time doing it.
10 Steps To Avoid The Goldilocks Resume Writing Syndrome, Part I (7)
Then build the resume around that objective. 10. Format the resume so it is attractive. Be consistent with the style of the headings, dates, states and bolding.
Finding The Right Conference Centre (8)
The same applies if you are holding a training event. Finding the right place is not about blindly picking the venue that is biggest nor the centre that has the most modern technology it is instead about finding the right place that is suitable for you.
How To Build A Home Theater System Step By Step (9)
But if not, instead of buying a new VCR, maybe it's time to invest in a DVD player all together. DVD The letters DVD (digital versatile disk) are becoming so common today that VCRs are almost obsolete.
Guide To Shopping For Sterling Silver Jewelry Online (10)
Sterling silver is a precious metal, which means that it is measured by the troy ounce weight system. It is said that approximately 31.1 grams of sterling silver equal one troy ounce.
Permalink to Options Trading Mastery: Understanding Spread Prices