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Vertical Direction

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Vertical spreads are one way to place directional trades, and we should be aware that vertical spreads of the same direction can react differently to volatility change.

For example, according to our study, short call spreads and long put spreads are both bearish strategies and they both react positively to an underlying price decrease. However, short call spreads react negatively while long put spreads react positively to the volatility increase.

Similarly, long call spreads and short put spreads are both bullish strategies, and they both react positively to an underlying price increase. However, long call spreads react negatively while short put spreads react positively to the volatility decrease.

So, when we are placing directional trades, we should also be aware of their different reactions to volatility change. For example, for debit spreads which benefit from volatility increase, we may enter the trade when IV rank is rather low, and for credit spreads which benefit from volatility decrease, we may enter the trade when IV rank is rather high.

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