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Option spread positions put an arsenal of strategies to profit with as well as to control risk. While stock traders can profit when a stock goes up or down it’s the trader that uses spread positions with options that can profit when the market goes up, down, is range bound, or whose price action stays flat. The main trading strategies used in the options market for spread trading are the Straddle, the Bull Put Spread, the Bear Call Spread, and the Covered Call.

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The Straddle is an option spread that is a volatility play and is directionally neutral. You buy a at-the-money (ATM) put option and a at-the money call option (both preferably 3 months till expiration depending on your time viewpoint) and are looking for a rise in volatility with the stock price moving explosively in either direction. The outlook you are hoping for is an explosive move in price which results in a huge profit in one option resulting in an offset in the cost of the other option. Your maximum reward is potentially unlimited with this strategy.

The Bull Put Spread is income strategy that is essentially bullish on a given stock that is either range bound or rising. The strategy is implemented by selling a higher strike price, in-the-money (ITM) put option and collecting the premium while purchasing a lower strike price, out-of-the-money (OTM) put option to limit risk if the stock should plummet below the OTM’s strike price. If the stock rises, both puts will expire worthless, and you simply retain the net credit from the sale of the higher, ITM put option.

The Bear Call Spread is the opposite of the Bull Put Spread detailed above. While it is also an income strategy it is implemented when your outlook for a stock is bearish or neutral to bearish and you are looking for the stock to fall or stay range bound. You sell an ITM call option while simultaneously buying an OTM call option to mitigate any risk in the event the stock should rise. If the stock falls or stays range bound then the options will expire worthless and you receive the net credit between the two different options.

The Covered Call is also an income strategy but with a different twist. Instead of a pure option spread, the holder of a given stock essentially "rents" his stock out to speculator in the options markets. The holder of at least 100 shares of a given stock (because each stock option controls 100 shares of this stock which will become apparent in a moment) essentially is bullish or neutral to bullish on his position. As an example, he sells a call option at a higher strike than his stock is trading and collects the premium. If his stock rises past the strike price at the time of the options expiration or stays the same that stock is either called away by the option holder or the options expire worthless leaving you the net credit of the option premium.

The topic of option spreads reminds me of a story that I was once told when I started trading in the option markets. A veteran trader once told me that traders who traded just pure call or put option plays had better stories about mindboggling option trades they had done but option spread traders drove nicer cars. I later realized that what he meant is that while pure directional option traders made huge profits at times it was option spread traders that made money consistently while never having to face huge losses because their style of trading limited their risk much better. With that, in closing, I encourage you to spend time mastering these option spread strategies and how to implement them for trading success.