Tastylive: It Took us 15 Years to Uncover this Options Trading Technique
Investors have a variety of tools for trading in the market. Many of those tools employ options. Most investors think of options as a directional bet. They buy a call option to bet on rising prices, or a put option for falling prices.
However, for shorter-term timeframes, traders can use options to bet simply on declining option values. Since an option has a limited timeframe before expiration, several tools exist to take advantage of this.
One such tool is the vertical spread. This uses two options, expiring on the same date, but with different strike prices. One option is bought, one is sold.
Typically, an investor will look to sell the higher priced option. This results in a credit, or cash added to an investment portfolio. The option that is bought helps hedge the movement of the sold option.
This significantly reduces the risk of selling an option outright, which could require a significant cash outlay.
Plus, traders who use spreads as far as 45 days out can see significant income as option premiums decline. They may be able to hold until expiration, or could roll the trade, as conditions warrant.
This trade can be used to generate small, but consistent, profits across even small investment accounts.