Options Spreads on the QQQQ - A slower way to lose money | Options Trading Strategies

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Options Spreads on the QQQQ - A slower way to lose money

There is a misconception among many traders that option spreads are an unmatched way to make profits in the market. They seem to offer so many benefits that it is difficult to see any drawbacks. However, too often spread trading is being pitched by the very firms that are most likely to benefit most from this strategy - the broker. Trading spreads can be an acceptable way to execute an investment strategy but you have to dig through the hype to really understand the trade-offs that you are making. Otherwise you could be merely sandwiching yourself between high commissions and trading costs and a volatile market.
Option Spreads

The good news is that there are real advantages to trading spreads. The most basic advantage is often fixed-risk. That means that you know how much you can lose in that particular trade before you even enter it. You will know what your maximum risk is and can be confident that in most cases it is impossible to lose more than that. The draw back of most spreads, however, is that the advantage of fixed risks costs a lot in additional commissions, capital and multiple bid and ask spreads. This is particularly problematic for short term traders.

In this section we will introduce the concept of vertical spreads, which are one of the most common ways to use this trading technique. A vertical spread consists of two calls or two puts. One of these options is sold short while the other is bought long. This may sound strange but the principle idea is to enter a trade that has a position you are hoping to make some profits on while simultaneously hedging through the other option. In the video, I will show you a specific example of this strategy applied to a bullish trade on the QQQQ.

In the next few sections I will break down the components of a spread and I will show you how to calculate your maximum risk and profit potential. Once you understand these concepts thoroughly you can start to evaluate opportunities of your own to trade spreads. By the end of this series you will understand the benefits as well as the costs of trading spreads so you can make an informed decision.

What do you think about intermarket analysis? We have talked previously about the influence that the VIX or equities has on the forex but what other relationships do you want to know about? Let us know in the forums.

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