Secret 79HOW TO ENTER SPREAD POSITIONS
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Spreads can be great trades, but for most investors they are
harder to execute. You should usually use spread limit orders to
enter spread positions. Here, you specify the maximum price or
debit you wish to pay for a debit spread and the minimum credit
or price you wish to receive for a credit spread.
A debit spread is a trade where you pay a price to enter the
spread, like buying options. A credit spread is a trade where you
receive a premium price when you enter the trade, like writing or
selling options.
For example, to enter a spread where you buy an IBM Oct 80
call at 3 and sell an IBM Oct 90 call at 1, you would enter a spread
order. Forget about the prices of the options. Look at the differences
(i.e. 3 – 1 = 2). Here, the difference is 2 points. The spread
order would say to buy the IBM 80 and sell the IBM 90 for a debit
of 2 points.
The problem with spread orders is that they can be hard to
get executed even if the bid and asked prices are in the right
place.
On the other hand, the big advantage of the spread order is
that you don’t risk losing control of the spread as you add each
leg of it. Either you get the spread price you want, or you do not
get the trade executed.
On several occasions I set a spread price where I was buying
at the asked price and selling at the bid price, and though it was
a trade that should have been executed automatically because it
was a spread order, it wasn’t. The good part is that I never had to
worry about losing control if one or the other leg of the trades
had gone through, leaving me naked.
Spreads can be great trades, but for most investors they are
harder to execute. You should usually use spread limit orders to
enter spread positions. Here, you specify the maximum price or
debit you wish to pay for a debit spread and the minimum credit
or price you wish to receive for a credit spread.
A debit spread is a trade where you pay a price to enter the
spread, like buying options. A credit spread is a trade where you
receive a premium price when you enter the trade, like writing or
selling options.
For example, to enter a spread where you buy an IBM Oct 80
call at 3 and sell an IBM Oct 90 call at 1, you would enter a spread
order. Forget about the prices of the options. Look at the differences
(i.e. 3 – 1 = 2). Here, the difference is 2 points. The spread
order would say to buy the IBM 80 and sell the IBM 90 for a debit
of 2 points.
The problem with spread orders is that they can be hard to
get executed even if the bid and asked prices are in the right
place.
On the other hand, the big advantage of the spread order is
that you don’t risk losing control of the spread as you add each
leg of it. Either you get the spread price you want, or you do not
get the trade executed.
On several occasions I set a spread price where I was buying
at the asked price and selling at the bid price, and though it was
a trade that should have been executed automatically because it
was a spread order, it wasn’t. The good part is that I never had to
worry about losing control if one or the other leg of the trades
had gone through, leaving me naked.