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Transcript
Want to trade options but looking to risk less money?
Spreads let you do just that.
Options are powerful because they let you speculate on price movement using leverage.
Spreads do the same, but in a more controlled fashion .
Less risk paired with less reward.
How is that?
Well, an option is a contract that, when purchased, gives the owner the right to buy or sell.
100 units of a stock or ETF at a specific price by a specific date.
And a spread is at least two options – two contracts: one to buy and one to sell of the very same stock or ETF.
This combination of buying a more expensive option and selling a less expensive option makes the spread cheaper than a single option.
Note: credit spreads which involve an initial credit to your account are not offered on eToro.
We’ll be talking about debit spreads in this video, which involve a debit to your account.
With debit spreads it costs you money to initially make the trade.
On eToro options there is both a bullish and bearish spread, just like with calls and puts.
Let’s compare bullish options with a bullish spread:
Let’s say you were comparing buying a call option to a bull call spread on, say, a risky tech stock – “Toastr” – which manufactures exciting yet kind of uncertain “smart toasters”.
You think that Toastr is going to go up in price in the next month.
Here’s the thing: you’re not the only one – many people do.
And because toastr is a very volatile stock, these factors make the call options very expensive.
Here’s what you get with a call option:
Let’s say Toastr goes up and up, past the price you predicted.
The higher it goes, the more you make, but it going very, very high, well, that isn’t very likely.
So, let’s say Toastr goes down:
You can only lose the cost of the premium you paid, but in this case that might be a lot because Toastr is a volatile stock.
Now, let’s look at a bull call spread on Toastr.
Let’s say Toastr goes up and up past the price you predicted: you would reap some of the profit.
The higher it goes, the more you make, but only up to a certain point.
Let’s say Toastr goes down: just like the call option you would lose the premium paid, but because spreads costless money, you would lose less.
If you think it’s going to the moon, then a call option may be best.
But, if you think it’s going to just, maybe the atmosphere, a bull call spread offers you a less expensive way of getting access to that price movement.
Here’s a pro tip to avoid a common pitfall:
Many beginning options buyers are seeking to buy inexpensive call options, so they will buy one that’s way out of the money or very close to the expiration date.
Generally, however, these options are only less expensive because they are extremely risky.
Spreads offer you a way to spend less money without engaging with riskier out of the money or close to expiration options.
The trade-off is that you lower your upside, you lower your reward, and your risk.
We hope this example gives you understanding to consider a bullish option versus spread.
Check out our other content in the description to learn more.