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Spreads

An options spread strategy is the simultaneous purchase and sale of the same type of option. For example, one could purchase a call option with a strike price of $50 and sell another call option with a strike price of $60. Ceteris paribus, this is called a bull call vertical spread.

Nice advantages to most options spreads are that they reduce the total cost of the trade and provide downside protection of sorts (one can only lose the cost of putting on the trade). In exchange, however, one usually gives up upside potential (e.g., it is capped to some limit).

There are many different types of spreads, including, but not limited to:

  • Bull call spread
  • Bear put spread
  • Vertical spread
  • Calendar Spread
  • Butterfly, Iron Butterfly
  • Condor, Iron Condor
  • Ratio spread, Ratio backspread

Due to the lower cost and the flexibility of the spread strategies, I recommend using them for the Darvas box method if capital constraints are an issue (or if you are risk averse, as I am).

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