Spread Trading

Spreads offer an alternative to directional strategies such as the outright purchase of calls or puts. Spreads typically contain both long and short option positions. Spreads can combat some of the risks of owning a call or a put - such as the erosion of time premium and fluctuations in implied volatility - while still rewarding you if your directional prediction is correct.

Three popular styles of spread trades are "Vertical Spreads", "Calendar Spreads", and "Diagonal Spreads":

• Vertical Spread: The purchase of one option and simultaneous sale of another option with the same underlying, the same type (puts or calls), the same expiration date, but with different strike prices.
• Calendar Spread: A long and short option position on the same underlying asset, but with different delivery months. Sometimes referred to as a time or horizontal spread.
• Diagonal Spread: A combination of vertical and calendar spreads, a diagonal spread is made up of a long and short position in two options of the same type (puts or calls), but with different strike prices and expiration dates.

How to enter a spread order

At TradeKing you can easily enter one spread strategy from one screen. A spread consists of two legs, and, consequently, two orders subject to two $4.95 ticket charges.

You can enter a spread order directly from the Spread Order Screen or by choosing your spread from the spread chain under "Option Chains"

Clicking on the bid (if you are selling the spread) or on the ask (if you are buying the spread) will send you to a prefilled order entry screen for your review of the order.