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This trade assumes that the underlying stock will NOT move down more than 42% in the next month.  If these trades are done together (as I am illustrating) it is an INCREASED risk position.  This is a Bull Put Spread (Credit Spread)

Position:

Buy QIUUA September 5 Put for          $0.35

Sell QIUUU September 7.5 Put for      $1.20

Net                                                                    $0.85

Break even for this position is OSIR trades for $6.65 ($7.50 – $0.85) on expiration.  Today OSIR is trading for $11.75.  This would be a decline of $5.10 in the next month, or 43%.  Possible, but not likely.

Maximum Loss would be $1.65/share (+ trading costs) OSIR – $5.00 or less.

Maximum Gain would be $0.85/share (- trading costs) OSIR – $7.50 or higher. 

Assuming $.15/share trading costs the gain would be $0.70 ($0.85- $.15) for a return of 28% ($0.70/$2.50) in one month, or 336% APR.

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The basic options spread involves the purchase of one option and the sale of a corresponding option.  Spreads can be done with either calls or puts.  Spreads can work very well by limiting the risk involved, however, they also limit the upside.  Spreads can be a very cost effective way to profit from the stock market, while at the same time limiting the risk.

Spreads have many names, but do not let that scare you.  As I said before, half of understanding anything is learning the “language”.  I will attempt to explain them in plain English.

The first Spread that I will explain is the Vertical Spread.

The Vertical Spread consist of buying a Call (or Put) and selling a Call (or Put) with the SAME expiration month, but with DIFFERENT strike prices.  That’s it.  Not very difficult.  This position will have a LIMITED loss potential, as well as, a LIMITED gain potential.  In other words, when you enter the trade you will KNOW the maximum gain and the maximum loss that can occur. 

Sometimes, you will hear of a Credit Spread or a Debit Spread.  A Credit Spread means that you will receive a positive inflow into your account (a credit) when you open the trade.  A Debit Spread means that you will pay (a debit) when you open the trade.

There are essentially four different Vertical Spreads that one can enter, they are:

          1)  The Bull Call Spread

          2)  The Bear Call Spread

          3)  The Bear Put Spread

          4)  The Bull Put Spread

next up – a discussion of the Bull Call Spread