Option spreads can be traded in the futures
(commodities) and equity options markets. An option spread is defined as
the simultaneous purchase and sale of the same or similar commodity, in
different or the same contract months. Trading spreads comes in many
forms and under many different names, such as “straddle”, “strangle”,
“calendar spreads”, and others. Spread trading is usually considered to
be a lower risk strategy than an outright long or short futures position,
and margin requirements are therefore usually lower.
Not only can spreads be utilized in the futures
markets, but equity options spreads provide even more opportunities for
successful spread trading. Trading option spreads offers many
opportunities, as there are many variables involved (strike prices,
trading months, and different markets), allowing numerous permutations
and combinations of strategies. Following are some of the advantages of
- They require smaller margin deposits
- They lower the investment risk
- Seasonal patterns exist among spread relationships.
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