Spread Trading using Options - A simple guide for traders and investors

EXCHANGE TRADED OPTIONS
Part 2: Puts, Calls and Spread Trading
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representative of OzFinancial Pty Ltd, AFSL number 241041
PH: 03 8080 5788
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EMAIL: admin@traderscircle.com.au

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Puts and Calls
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There are two different types of options
available:
1 2Put Options Call Options

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Put Options
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Put options gain value as the share price
of the underlying asset falls...

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Put Options
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it will give the buyer the right but not the
obligation to sell a parcel of shares for
a greater value than it is worth on the
market.

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Put Options
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The more the share price falls the more
the put option will gain.

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Call Options
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Call options gain value as the share price
of the underlying asset rises.

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Call Options
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Call options give the buyer the right but not
the obligation to buy a parcel of shares for a
lessor value than it is worth on the market.

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Call Options
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The more the share price rises the more
the call option will gain.

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Puts and Calls increase in value when...
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Call
Option
Underlying
value of
share price
increases.

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Puts and Calls increase in value when...
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Call
Option
Underlying
value of
share price
increases.
Put
Option
Underlying
value of
share price
decreases.

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Options Expiry
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All options have an expiry date and a trader
or investor has the ability to
choose an expiry month.

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Options Expiry
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The more time until expiry, the more time
value that the investor will need to pay.

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Options Expiry
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An option buyer has two choices:

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Options Expiry
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Either - Sell the option contract before the
expiry to realise a profit or loss.
(Trading the option)

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Options Expiry
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Or - Choose to exercise their right to buy
or sell stock at any time up until the
expiry day of the option.
This is often used by investors as a strategy to
buy or sell shares.

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Spread Trading
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Spread trading uses a combination of different
options contracts to allow a trader to tailor
their trade to a specific view of a stock, or
market direction.

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Spread Trading
The clear benefits of spread trading over
just trading single options is the ability to
profit from different market conditions
not just direction.
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Spread Strategies
An options trader has the ability to profit from
a rising, a falling and a neutral or sideways
market.
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With spreads you can use:
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Directional strategies for a falling market.
Time decay strategies in a sideways
or channeling market.
Directional strategies for a rising market.

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With spreads you can use:
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There are spread strategies that
can even profit if the market either
rises or falls, as long as it moves in
either direction.

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Spread Strategies
This is a great alternative if you don’t have a
directional view but your view is that the
market will move.
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Credit and Debit Strategies
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There are two main types of spread strategies,
which can be set up in many different ways to
create different strategies in the market.

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The two main spread strategies are:

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1 Credit Spreads

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1 2Credit Spreads Debit Spreads

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Credit Spreads
In a credit spread, we receive money from
the market to open a trade.
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Credit Spreads
The best-case scenario is for the options to be
out-of-the-money on expiry day so that they
expire worthless and you keep the credit
received.
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Credit Spreads
An example of strategies which you will receive
a credit upon entry are the:
1. Bull Put Spread
2. Bear Call Spread
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Example Bull Put Spread
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This is a chart of CBA, where
the overall trend is up.
We expect the share price
to move sideways to slightly
bullish.
Trend Line
Support
Resistance

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To set up bull put spread, we
simultanesouly buy one put
option and sell another put
option at a higher strike price.

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Sell Put 80.00
Buy Put 79.00
To set up bull put spread, we
simultaneously buy one put
option and sell another put
option at a higher strike price.

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Sell Put 80.00
Buy Put 79.00
We receive a credit on
entry on this strategy.
The ideal outcome will be
the share price remaining
above the higher strike,
meaning the options expire
worthless and we keep the
credit received.

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Max Profit 100%
Breakeven 79.79
Credit to enter: 0.21c
Risk of the trade: 0.79c
Maximum Profit: 26.5%
Sell Put 80.00
Buy Put 79.00

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Example Credit Spread
Investors commonly use credit spreads as
they can use the collateral value of their
portfolio to cover the risk.
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Debit Spreads
A debit spread is where we pay to enter the
trade, and the money paid to enter is the
maximum at risk.
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Debit Spreads
A debit spread has a bought and a sold option.
The bought leg is more expensive, which
results in paying money to open the trade.
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Debit Spreads
The sold option will offset the cost and the
effects of time decay of the bought.
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Best Case Scenario
The best case scenario is for the options to be
in-the-money on expiry day.
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Best Case Scenario
That means we close the trade and receive
back from the market more than we paid.
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Debit Spread Strategies
Examples of strategies that we pay to get into:
1. Bull Call Spread
2. Bear Put Spread
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Example Bull Call Spread
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This is a chart of SUN, where
the overall trend is up.
We expect the share price to
rise moderately.

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To set up a Bull Call Spread,
we sell one call option and
buy another call option at a
lower strike price.

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Sell Call 14.00
Buy Call 13.50

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Profit 100%
Breakeven 13.78
Loss 100%
Entry Price: 0.28c Debit
Potential Profit: 0.22c or 78%

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We pay to enter this strategy.
To realise a profit from this
strategy, the share price
needs to be above your break
even point on expiry day.
A large movement higher
before expiry will also result
in a profit.
Breakeven 13.78

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Why traders use debit spreads
Time decay is offset by the sold leg
They reduce the capital needed to trade
There is more flexibility to switch or
repair a trade.
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Conclusion
By setting up strategies with more than one
strike price, we can help reduce risk and trade
a variety of market conditions.
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Conclusion
It is vital that before entering the market, you
learn the skills and gain the experience
to trade confidently.
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Interested in becoming a trader?
The right education is essential if you want
to reach your trading goals.
Register with us today to learn more about our
trading education programs.

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Warnings and important information.
Any advice contained in this communication is general only and does not consider
your objectives, financial situation or needs, and you should consider whether it’s
appropriate for you. If you are thinking about acquiring a financial product, you
should consider our Financial Services Guide (FSG) at www.traderscircle.com.au and
the relevant Product Disclosure Statement (if there is one available) first.
Trading options is not suitable for everyone. There is a risk that you can lose more
than the value of a trade or its underlying assets. You should only act on our
recommendations if you are confident that you fully understand what you are doing.
Past returns do not reflect future returns, and it is also possible to make significant
losses. We employ expert traders and use strategies that maximise returns and
minimise risk. However, there is always a risk of loss when trading and investing. This
is general information, and is not prepared for your specific investment objectives,
financial situation or needs. Consult a licensed investment adviser before making
investment decisions. TradersCircle Pty Ltd, ABN 65 120 660 497 is a corporate
authorised representative of OzFinancial Pty Ltd, AFSL number 241041.

Spread Trading using Options - A simple guide for traders and investors

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Spread Trading using Options - A simple guide for traders and investors