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Verticals for Smaller Accounts

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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.

Traders who are just starting out and those with smaller accounts might find some worth and efficiency in the use of verticals. Naked options can tie up a large amount of capital and pose potential risk that tastybite traders are not comfortable with. We use verticals in order to gain efficiency in our trades relative to the capital that we are putting up for our trades; that is, verticals tie up less capital than naked options and thus returns are greater as a function of Buying Power Reduction. However, traders should recognize that the probability of profit for a short put spread, for example, going to be less than that of its short naked put counterpart due to the decrease in credit received.

Tom goes on to walk through how we generally set up credit and debit spreads – both options out-the-money for credit spreads and one in-the-money option paired with an out-the-money option for debit spreads. Also, we like to initiate credit and debit spreads in specific IV Rank (IVR) environments. We implement credit spreads when IVR is high because we have historically received a larger credit relative to the width of the spread when Implied Volatility has been high. On the other hand, we use debit spreads to act on our directional biases in times of low IVR due to the potential reward being greater in these environments relative to the debit paid for the spread.

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