Vertical Call and Put Spreads

You can use vertical spreads (debit) to buy options that would otherwise be too expensive for your risk tolerance. +

Advantages Neutralizes theta (time) decay if you don’t go too far OTM and IV crush if the spread isn’t too wide (meaning the difference in strikes) Lets you control your risk –

Disadvantages Lower rewards if you are correct about the direction. If you see an exit alert with +100%, you may only get +25% You need margin account and that will be subject to PDT rules unless you have more than a $25k balance As of writing TSLA is trading at about $880. These expire June 5, 2020 (in less than 5 days) so it’s as cheap as you can get ATM. If you are bullish on TSLA, you buy the 880 Call and sell the 885 Call. All debit call spreads are like that. You would pay $2551 per a contract on the 880 Call and collect $2320 on the 885 Call so each spread would be $231. If you were bearish you would be long the higher strike put, and short the lower strike put. For example, long 880 Put, short, 875 Put. Max gain is always the difference between the strike prices. In this case, 885-880.

But that is only if the stock closes above 885 at expiration. You can and probably should sell it before that if you in profit or if you cannot afford assignment. For puts, it’s the same, 880-875 is the max potential gain.

In contrast, if you were to play the single leg and only wanted to risk $231, you would have to buy at least the 1010 Call or maybe even the 1015 Call. Compared to the vertical spread, the far OTM options gains will be much greater if the momentum continues in your favor. But any slow down and theta decay and IV crush will be be devastating. IV crush especially, will be more than single leg ATM option such as 880 Call