Vertical debit spreads: Better than just buying calls or puts. / Options trading strategy basics 101, option debit spread, debit call spread, debit spread strategy, vertical spreads, vertical spreads explained, vertical spreads strategy, vertical spread example, vertical spread options, vertical spread option trading, vertical spread strategy, vertical spread put, vertical spread adjustments, option spreads, vertical debit spread definition, vertical debit spread examples, vertical debit spread example david moadel
welcome to looking at the markets with
David Modell today i wanted to talk
about how i like to set up vertical
debit options spreads and I do it
differently than most people
so let's let's talk about that
initiating a vertical debit spread is a
simple but effective way to make a
directional bet on an underlying asset
such as a stock or ETF or whatever
vertical means that for the bought and
sold options the expiration dates will
be the same the underlying asset will be
the same for example they're both Apple
the type of option call or put will be
the same and the quantity of the options
will be the same for example if you're
buying five calls then you're also going
to sell the same number five calls
but the strike prices will be different
that's what makes it vertical vertical
spread the only thing that's really
different between the option that you're
buying and the option that you're
selling is is the strike prices they'll
be different pretty much everything else
will be the same and it's a debit spread
because you're paying out money in the
beginning in the hopes that the value of
your options spread will go up and
you'll be able to hopefully resell your
options spread for a profit
so here's how i like to set it up
I like to buy in the money options
because they are in my opinion higher
quality options they tend to lose their
value less quickly when the underlying
stock goes against you or just go
sideways
all in all I in the money options are a
safer bet
and I like to sell out of the money
options because they are in my opinion
lower quality options they tend to lose
their value more quickly when the
underlying stock goes against you or
just goes sideways and so I do it
differently than most people i think
most people buy it out of the money or
at the money options
not as many people attend to but from
what I've seen and witnessed most people
don't buy in the money options but to me
those are the higher quality ones and i
like to buy quality stuff and if i'm
going to sell I I don't want to sell
quality options i want to sell options
that are going to deteriorate more
quickly and so I sell out of the money
options so let's look at some examples
of the behavior of these options
alright so here's an Amazon call spread
and it's a debit spread because you
you know you would be paying money in
the beginning
in order to gain a profit hopefully
later on and its vertical because the
the type of option is the same you know
we're buying a call and selling a call
same underlying stock amazon and amazon
same expiration date April 21st and
April 21st the only difference is the
strike pro in the same type they're both
calls the only difference is the strike
prices
ok so you've got well if Amazon is right
now selling for amazon stock is selling
for 849 dollars and twenty-eight cents
per share then
I would be buying as i mentioned in the
money such as the eight-hundred-dollar
800 strike call and selling
out-of-the-money such as the 900 strike
call
alright so buying in the money selling
out of the money buying the good stuff
selling the junk i'm not saying that all
out of the money options are junk but to
me they're usually not high quality
alright so and notice the behavior ok
amazon was pretty much flat today went
up a tiny bit
amazon stock and the in the money call
went up in value the out-of-the-money
call went down in value and that's good
ok so you're making money both ways
you're making money on the spot or
purchased call going up and the sold or
short call going down in value that's
that's good and good they're both good
alright let's look at some more examples
here's target right now selling at fifty
seven dollars and eighty-five cents per
share block the 55 and the money call
sold the 65 out-of-the-money call
at target was again pretty much flat
went up a tiny bit today and the a look
at the end of money call went out went
up in value the out-of-the-money call
went down in value
that's what I'm looking for ok and
that's why i buy in the money and sell
out of the money
here's another example Tesla currently
selling at 251 dollars and fifty four
cents per share
i bought the 240 call option in the
money sold the out-of-the-money 270 call
option and look at that the tesla went
up today
and the in the money call option behaved
as it should it went up the out of the
money call option went down even though
tesla stock went up today the out of the
money call option went down
that's why i sometimes call out of the
money options junkie i call them junk
sometimes they're not all junk but in
this case we can see that yeah they
don't behave well in many cases if the
stock goes up a call option should go
out but out-of-the-money doesn't behave
well all the time whereas the end of the
MP and the money call option did behave
well today
alright here's another example of that
of how in the money options tend to
behave better
out of the money options oftentimes this
is visa and it's currently selling at
eighty-eight dollars and seventy-nine
cents per share this is the in the money
call option 8250 strike and this is the
out of the money call option 100 strike
and visa stock went up today and the in
the money call option reflects that it
went up like it should look at the out
of the money call option it went down
even though the stock went up so that's
why i buy in the money and sell out of
the money i just prefer the behavior of
the end of money call options as opposed
to the out-of-the-money so i hope they
give you some insight into how I like to
set up a vertical debit option spreads
there really a great stock replacement
tool instead of buying a hundred shares
of stock
it's it's a great alternative
and it costs less money up front in most
cases to initiate a call spread ok or it
you could you know instead of shorting a
hundred shares of stock you could
initiate a vertical debit put spread and
we did not show any examples of this
today but it's the same principle by in
the money sell out of the money so i
hope this was helpful to you if you like
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