Class: Introduction to Spreading
OIC Education Program

Introduction (1 of 8)

Beyond the outright purchase of a call or put, or the slightly more complex covered call position, is an array of option strategies called spreads. What is a spread? Simply put, it’s a strategy that involves buying one option, call or put, and writing, or selling, another, resulting in a position that is simultaneously both long and short option contracts. To establish a spread and be poised to potentially make a profit, both the option purchase and sale are opening transactions and are commonly transacted as one package. That is, the option purchase and sale are executed simultaneously.

Vertical spreads

This class will deal with perhaps the most basic and commonly used type of spread called a vertical spread. Vertical spreads are made up of either all calls or all puts on the same underlying stock, with the same expiration months but different strike prices, at a one-to-one-ratio. That is to say you might buy one XYZ June call with a given strike price, and write an XYZ June call with another strike price. It’s common in the industry to refer to these two distinctly different parts of the spread — the long and short options — as the spread’s legs.

Vertical spreads:

  • All calls or all puts
  • Same underlying stock
  • One long option & one short option
  • Different strike prices
  • Same expiration month
  • One to one ratio