In this video, we will continue to discuss options trading math to expiration for calls and puts, by talking about long and short option spreads.

The video will use the options trading spreadsheet to go through the profit graph and risk-reward for the different types of spreads, along with covering the following:

• What is an option spread
• What is the difference between short and long spreads
• Unlike a short option is a short spread a covered trade
• Covered short options

### Call And Put Options Spreads

An options spread, also called a vertical spread, is an option trade done with either calls or puts.  The trade involves buying one option and selling another option of the same type, quantity, and expiration, but at different strikes.

These spreads are covered trades, meaning the maximum loss is known when the trade is done.  But these spreads also have a maximum gain, since 1 option is bought and 1 option is sold.

Vertical spreads can be done as debit spreads, meaning that there is a cost – or credit spreads, meaning that you receive money when the trade is done.

Note:  our trading strategies use timing setups to enter what would normally be a debit spread, but actually get a credit for doing the trade.

• Long Call x Short Call of higher strike +50c x -55c
• Long Put x Short Put of lower strike +50p x -45p

• Short Call x Long Call of higher strike -45c x +50c
• Short Put x Long Put of lower strike -55p x -50p

Graph1:  Compare +1 50 call 2.00 -1 55 call 1.00 to 100 shares bought at \$50

Graph2:  Compare -1 50 call 2.00 +1 55 call 1.00 to 100 shares sold at \$50

Graph3:  Compare +1 50 put 2.00 -1 45 put 1.00 to 100 shares sold at \$50

Graph4:  Compare -1 50 put 2.00 +1 45 put to 100 shares bought at \$50

### Covered Short Options And Stocks

A covered short option is one where the maximum loss is known.

A vertical spread includes a short option, but it is covered by the long option.  This is the case whether the spread is a debit spread or credit spread.

Short options can also be covered by the underlying in a stock option combination:

• Long Stock + Short Call +100 shares \$48 -50 call 2.00
• Short Stock + Short Put -100 shares \$52 -50 put 2.00

NOTE:  The short option is covered by a stock option combination, however, the maximum loss in a stock trade can only be covered by a long option.

In our next video we will continue to look at covering short options with stock trades and covering stock trades with long options.  But we will do so by looking at how this fits our stock option combination strategies and using setup timing for the trades.