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For All Your Investing Needs |
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Welcome to the Options Section of Options Realm |
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The Bear Call Spread, Endless Leverage? Have you ever wondered what else you could do with derivatives besides just buying a call or a put? Well, I did to and after lots of research I found out about options spreads. An options spread is when you buy a derivative and sell a derivative on the same commodity but for different strike prices. This way a savvy options trader can hedge out risk by creating the right spread. But you must be asking about how you make money if you are buy and selling a derivative based off of the same commodity. Well, yes when you buy a call you are betting that the object the option is derived from will increase in value. And yes when you sell a call you are betting that the object the option is derived from will go down. So then, why would you buy and sell derivatives based off of the same object? Here is the answer...LEVERAGE! Well, what do I mean by that? When you enter into an options spread you get the difference is strike prices right away. The spread’s maximum profitability is the amount that you get up front. So in theory you can continue creating options spreads forever but that is not the case. Leverage can be a bad thing and you should avoid excess use. The advantage for an options spread is options are sometimes mispriced as they are each individually trade objects. A good options trader will be able to see these inefficiencies in the market and can take advantage of them. Sometimes the market will be off by so much the trader can make a guaranteed profit. Sounds pretty crazy but it does happen. |
