Selling And Buying To Form A Spread

Either you buy or sell a call or a put option, you’re using one option strike alone, which means that you are trading on a one single contract month with one of which has an expiration date and underlying. 

The Greeks are applying for that one option alone. On the other hand, it depends on what type of spreads you will be using, you might use a different strikes but multiple months. On a different case, when you trade in future options, it has a corresponding multiple underlying contract. 

Basically, we should first have the knowledge of a basic spread and what does it mean.

If the idea of a spread is to reduce to its most basic or important characteristics, it would best represent the use of two option contracts, which is known as the “legs” of the spread. With the use of two legs, simply means that you are making a combination. 

For instance, a call option that you buy (sell) with a call option that you sell (buy). Thus, both sides of the market were taken in all spreads (buying/selling or selling/buying) which is typically as easy as it is. 

Though the spread is very simple, it is quite difficult in practice mainly on the implications for profit/loss given a directional move of the underlying. Most of the traders are not into considering the risk dimensions which are measured by Theta and Vega, however, it doesn’t make them any less essential. 

One important measure of risk is the “Greeks”, it consists of Delta, Vega and Theta. Delta measures the exposure of changes of a certain price, Vega measures the exposure of changes of volatility, and Theta measure the exposure of the decaying time value. 

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