Vertical spreads are a type of options spread strategy that allow you to profit when the price of the underlying security moves up or down. They involve buying and selling an option at different strike prices, to profit from a move in the underlying security’s price. In this post, we will show you how to manage vertical spreads for maximum profit!
We discuss:
The Best Way To Sell A Vertical Spread- How to Manage Vertical Spreads
- Must Know Vertical Spread Option Tips
Real quick guys, please comment and let me know your thoughts on this post.
Also, be sure and grab the FREE Simplified Options Strategies Trading Guide. It covers the different options strategies setups, how and when to put them on, max profits, and trade management. It’s a great guide to have by your side when trading options.
So let’s get started!
In the last post, How To Make Money Trading Vertical Option Spreads, we discussed what vertical option spreads are, how to sell them, Max Profit and Loss and their advantages. If you missed that one, be sure and check it out. I’ll put a link down below.
Now let’s talk about:
The Best Way To Sell A Vertical Spread
When we sell a Vertical Spread we need to first decide
What expiration should we pick to sell vertical spreads?
There are weekly options and monthly options available. The monthly options expire the third Friday of the month. I prefer the monthly options since they allow more time for the options math to work in our favor.
For this reason, we should consider placing trades with 25 – 45 DTE.
When we are selling options we are selling time premium and collecting Theta. We discuss this in detail in the “Use the Greeks To Obtain An Options Trading Edge” video. I’ll link it down below.
We also need to consider:
How do we pick our strikes when selling vertical spreads?
The nice thing about trading options is that we can choose our strike prices. This is our probability of profit.
We can choose strikes that give us a 90% POP where we only have a 10% chance that we will not make money. However, when we do this, we probably not collect a very high option premium. On the other hand, we can choose a much lower POP like 60% and collect a much larger premium. We may collect double the amount that we would collect by selling the 90% POP Vertical.
What matters the most, is the long-term profits over time and making money consistently. To accomplish this, the options mathematics indicates that collecting 1/3 the width of the strikes is optimal when selling vertical spreads.
Lastly, we need to consider:
Should we sell vertical spreads in high or low volatility?
When we sell options we want to do it in high-volatility environments. The higher the better since we collect more premium in high IV. When Implied volatility is high we can go further away from the current price and still collect a good amount of premium and of course we shoot for 1/3 the width of the strikes.
In low IV we have to go much closer to the current strike price and sometimes we can’t even collect 1/3 the width of the strikes. So these trades are much riskier and we have a much less chance of being profitable.
How to Manage Vertical Spreads
Once we have placed the trade, we need to ask ourselves what we are going to do next. Are we just going to sit there and let the trade do what it is going to do and not worry about it?
Well to be honest, the nice thing about trading verticals is that you can do just that because it is a defined risk trade. You don’t have to worry about it skyrocketing up or down through your short-strike price since you have bought the protective option as well.
However, if we want to increase profits the most, we can manage vertical spreads. By managing our spreads we can smooth out the volatility of our options trading portfolio as a whole. We can swing for home runs all of the time. Because what comes along with doing that? Striking out of course!
When do we close out vertical spreads?
Instead of swinging for the fences, we can manage our trades. We hit singles and just piling up the hits (or option trading wins) over time. We do this by closing out trades for wins when they meet 50% of max profit.
So instead of just leaving the trade alone until expiration, we close wins out early when they reach 50% of the max profit. By doing this we lock in the profits and free up cash for another trade.
When do we roll vertical spreads?
So approximately 50% of the trade will be winners that we close out. The other 50% will be losers and go against us. For these trades, we want to keep the dream alive! Instead of closing them out for losses, at 15 to 21 DTE, we roll to the next monthly options cycle.
By doing this, we give the trade more time to be right and come back.
If the trade does not come back within this next options cycle, we do it again. At 15-21 DTE, we roll again the next month. Most of the time the vertical comes back and turns profitable after the first roll. However, some of the time (pretty rarely) it takes 2-3 monthly rolls to breakeven or turn profitable.
So let’s summarize these
Must Know Vertical Spread Option Tips
- Sell vertical spreads with 25 – 45 DTE
- Sell Vertical spreads when IV is high
- Collect 1/3 the width of the strikes when selling verticals
- Close out vertical spreads at 50% max profit
- Roll vertical spreads at 15-21 DTE
Alright guys, thanks for reading!
Also, be sure and grab the FREE Simplified Options Strategies Trading Guide. It covers the different options strategies setups, how and when to put them on, max profits, and trade management. It’s a great guide to have by your side when trading options.
Happy trading and I’ll see you in the next one!
How do you manage Vertical Spreads?
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