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Lesson 10: Selling Vertical Spread

Selling Vertical Spread

Selling Vertical SpreadAfter you have seen in the last article the Vertical Spread, let's see in this lesson an example of Selling Vertical Spread on the platform for a better comprehension of the strategy.

After a study of the Apple's chart, we decide to sell a Bear Call with the sale of a Call option strike $ 160.00 and by buying the Call option strike $ 165.00, both with expiring July 21st, 2017. Below you can see the strategy on the platform.

Selling Vertical Spread

 

In the row we can read all the parameters: AAPL (Apple) the underlying, JUL the expiration month, 160/165 the two strikes. Bull Call is the name given by the platform to this spread because, it is a good platform, but it does not read in our mind, and it does not know if we want to buy or sell the strategy. The following three values represent the bid, mid and ask about the strategy's price (the premium).

We put as selling price $ 0.72 and below you can find the detail of the strategy, for which Interactive Brokers ask us $ 500.00 as margin.

Selling Vertical Spread

 

Let's see what the image above tells us. First of all, as you can see, my platform is in Italian, but it is not a problem because I will translate all the items of interest. On the left, we can see the Max Gain (rendimento) that corresponds at the premium received by the market for the strategy, $ 72.00, and the Max Loss (perdita) that is given, as we have seen, by:

Max Loss = (high strike – low strike) *100 – premium received

In our case:

Max Loss = ($ 165.00 – $ 160.00) * 100 – $72.00 = $ 428.00

On the right, we can find the Chart (grafico) performance, which is nothing more than a common Cartesian chart with on the right (y-axis) the P&L (Profit & Loss) and below (x-axis) the price of Apple.

Based on the underlying value of Apple, we have a Profit or Loss. By placing the mouse on the line made of points, we can know which ones will be based on the value of the underlying. We will get the maximum gain if Apple will close at expiring at $ 160.00 or lower, while we will have the maximum loss if Apple will close at $ 165.00 or higher. The zero line indicates the break-even level that is located at $ 160.72 and is calculated as below.

Break-even = short call strike + premium received

In our case:

Break-even = $ 160.00 + $ 0.72 = $ 160.72

The Selling Vertical Spread we have just seen is the simplest and most common strategy with options and, like all the simple things, it is also the most profitable and used.

 

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