An Alternative Way to Trade Spreads

July 19, 2024

Even if you’ve been following me for only a short time… you likely know that I love trading options.

And of all the types of options trades available, my hands-down favorite is a vertical spread.

Vertical spreads put the risk/reward scenario in my favor. They are able to reach triple-digit profits far quicker than merely buying a single call or put.

As a quick refresher, you create an options spread by purchasing one option and selling another on the same underlying asset with the same expiration. You can use calls or puts, and it all happens in one order with a combined single price.

We trade vertical spreads – both bullish and bearish – in my paid services, Alpha Money Flow and Launch Investor.

In fact, we just took a 120% gain on a Carnival Corp. call spread this week!

Now, with new subscribers who aren’t familiar with the strategy, I often get this feedback…

I can’t trade spreads in my brokerage account. Can I just buy one call and sell the other separately?

It’s a fair question… and a crucial one for those who don’t have an options clearance with their brokerage.

Here’s my answer…

Spread the Wealth

First, one thing to understand about vertical spreads. I use them in order to ensure that my entry price between the two options is exactly (or even less than) what I want to pay, and not a penny more.

Say I want to target an XYZ September 20, 2024 $100/$105 call spread. I’m looking for a 200% profit at or before expiration.

Because the spread (the difference between the two strikes) is $5, the most I can make is $5 per spread (or $500 because a single option contract represent 100 shares).

Knowing my maximum profit is $5, I know I can’t pay any more than $1.66 when I enter the trade, in order to potentially walk away with a 200% profit.

I place a single order, with a single limit price, and walk away from the computer to go golfing.

That’s how I like to trade!

But here’s the thing…

You can absolutely mimic spread trades if you aren’t able to trade them in your account.

It just takes a little more diligence and discipline.

It Takes Two

The key to buying and selling the two options independently is to do your best to get into the trade for the combined price you want.

One way to do that is to simply watch the options chain and wait for the combined price to reach your desired limit price.

This method works… but it’s a pain. It requires that you’re glued to your computer screen, constantly calculating the combined price with every move.

That sounds miserable!

A much better method is to set an alert in your trading platform that sends you a notification when the desired spread trades to the limit price you’re targeting.

Once you receive the alert, you can quickly buy and sell the individual options to get into the trade.

This method isn’t foolproof, though. You might still end up paying more than the desired price to enter the trade… but you also might get a slightly better fill!

Another way to make this alternative method a little smoother would be to “stage” both individual legs of the trade, and then hit send once you get the notification.

This method, too, is not foolproof, but it’s a good alternative to using a spread order.

Again, you just want to make sure you’re getting into the trade as close to the desired limit price as possible.

If you’re not familiar with setting up alerts or staging orders, it’s very simple… and a quick call to your broker should clear up any questions.

While I prefer to trade spreads directly, these methods are good “options” for those aren’t able to trade spreads in their accounts.

They’ll help you capture many of the benefits of spread trading… and become a more confident trader.