Learn How to Pay for Vertical Spreads Using an Option Ladder Strategy
Options are priced to lose, so it generally makes sense to avoid paying too much for an option, or an option strategy such as a vertical spread. Yet, selling naked options to help finance long option trades can get hairy if market volatility explodes. Some traders opt for ratio spreads, which can generally give traders the ability to profit in most market scenarios, but wreaks havoc on a trading account if the directional play is "too right." Perhaps one way to combat the disadvantage of trading ratio spreads, while maintaining most of the benefits, is an option ladder. This is basically the practice of staggering the short option strike prices of a ratio spread. Another way to look is the sale of an additional option with a distant strike to cover the cost of a vertical debit spread. For instance, a trader could buy a near-the-money call option, sell an out-of-the-money call option, then sell a further out-of-the-money call option. Depending on how the trade is structured, this could result in a "free" trade, a cheap trade, or even a small credit. Join Carley Garner to discuss the risks and rewards, as well as the advantages and disadvantages of trading option-ladder spreads.
Options are priced to lose, making a long option-only strategy flawed without perfect timing and price prediction. Selling options to finance long option trades can be beneficial if the trade is structured correctly in regard to risk and reward. Understand the peril of traditional ratio spread trading. Learn how to modify ratio spreads to create a ladder strategy with less relative risk. Create close-to-the-money options on futures strategies without spending a fortune in option premium.