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Vertical spreads: Credit vs. debit
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FOT-April 2008-2
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Picking the right kind of spread requires considering volatility and time decay in light of how much your position is in or out of the money.
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Detailed Description
One of the most fundamental questions in options trading is whether you should simply buy an option or create a vertical spread by purchasing one and selling another with the same expiration date.
To choose the most appropriate vertical spread in a given situation, you must study all the variables that influence an option spreads profitability. Clearly, directional exposure is important, but other subtle factors such as time decay, implied volatility, assignment risk, and trading costs play a critical role.
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