Options Trading for Beginners: Buying a Call or Put vs. Options Spreads
January 14, 2015
Last update: August 2021
I always do the easiest when possible on a strategy selection.
With that said, nothing is easier than buying a long call or a long put straight out or buying and selling the stock for a swing trade, short-term play for 1 to 10 days.
So why turning long calls or puts into spreads? The only reason to turn into a spread is when you need to:
- Lower the Theta or
- Lower Vega (volatility) or
- Lower the cost.
And when you do this you are also lowering the Delta which means you aren’t going to get as much of a payout and pay more in commissions because now you have twice as many contracts.
So, I personally use spreads when:
- I need the cost lower or
- I need to hedge time or
- I need to hedge volatility or
- If a stock is above $100 or
- All the above.
Another reason for a spread is if I plan to hold the position for more than 1 month and I am buying 3 to 6 months out. So, again, use spread if you are buying 3 to 6 months out and the price is high and it needs to be lowered through a spread.
Also, I will use spreads like Diagonals to take advantage of short moves and time decay of near-term options.
But all in all, nothing beats the long call or put on a near-term quick move.
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Thanks Gino. Thats Helpful. Hope your feeling better!
Great advice thanks Gino.
so – what elements do you generally look for in calls/puts? Let’s say I have a stock that I think is going to be bullish and the sector is bullish (healthcare — OHI). I typically will look for a position with a little time and a delta-like the Mar15/$40CALL whose delta is at .89. I generally will look for deltas on calls at/near .60. So it sounds like the time to keep that trade is really 1-10 days (because of time decay?). Should I look for the Feb calls, a lesser premium? I know OTM calls are riskier, but I also try to see if there is any volume. It’s probably a bigger question than I am able to articulate – but just wanted to understand some good patterns to model so I know when to go 5-8 months out vs 30-60 days. I am currently 6 months out on RAD – just because it moves so slowly. It surprised me and moved fast recently, so I sold half my positions and am still long for July. I think it was just dumb luck – but really want to get to a point where I can say – I knew that was going to happen. Thanks! I understand the spread aspects a lot better from this.
What option to buy is taught many ways, rule of thumb, Buy more time than you need, at least twice as much time than you need. On swing trades which are normally 4-10 days long I am buying around a month out. For trend trading it can be anywhere from 3 to 6 months. I dont usually hold thru earnings therefore never hold anything over 3 months.