Vertical vs credit spreads in Singaporean options trading

Options trading is an advantageous way to make money in the stock market, but like any other strategy, it involves risk, and there are many different strategies available. One such strategy is Vertical spreads, including a bullish spread and bearish spread. 

These include purchasing one call option at a lower strike price and selling another call option with the same expiration date and at a higher strike price with the same expiration date. The primary difference between vertical spreads and credit spreads is that there is no initial cash payment for vertical spreads, while credit spreads require an initial outlay known as the ‘credit’.

What is a credit spread?

The most basic equation for calculating maximum profit for a bull put spread or bear call spread (the two components of a vertical spread) is: Max Profit = Strike Price of Short Call- Strike Price of Long Call-Net Premium Received

A vertical spread is constructed with the same expiration date for both options. A credit spread involves an initial outlay but has a higher return potential. The most basic equation for calculating maximum profit for a bull put spread or bear call spread (the two components of a credit spread) is: Max Profit = Strike Price of Short Put – Credit Received + Strike Price of Long Put – Net Premium Paid

Max Loss = Total Premium Paid – Maximum Profit

In this equation, the total premium paid refers to the total amount paid to establish the position and can be calculated as follows: Total Premium Paid = Initial Margin + Maintenance Margin.

Initial Margin is calculated as Initial Margin = 100% *(Short Put Strike Price + Short Put Premium Paid)

Maintenance Margin is calculated as Maintenance margin = 100% * (Short Put Strike Price – Long Put Strike Price)

What is a vertical spread?

The intrinsic value of the options contracts changes along with underlying stock prices. If options are allowed to expire, the loss incurred by vertical spread strategies increases over time. Credit spreads, however, do not incur any losses until the short position expires worthless.

Here is an example of a vertical spread: buying one put with a strike price of $1 and selling another put with a strike price of $2. This will be done simultaneously, thus creating the classic “vertical” spread.

You can also buy (go long) the first option and sell (go short) the second option, and both options have the same expiry date but different strike prices. The investor/trader seeks for this difference between the two strikes to widen significantly up to expiry, thereby allowing them to pocket cheap premiums. If that happens then, everything works out well for this position.

If that fails, however, one has created a credit spread which would mean taking on more risk than initially planned – since what was sold may have to be repurchased at a higher price than expected.

Differences between a credit spread and a vertical spread

A credit spread is the same “structure” as a vertical spread except that we take in / collect premiums from what we sold and don’t pay anything to buy the second option. 

This creates an asymmetry between risk and reward: if both options expire in the money, then one way or another, we lose money – this means that there is zero return on investment (ROI). If both options expire out-of-the-money, however, then again, one way or another, you lose – but although it may seem like losing twice, you still end up with some money in your pocket.

Bottom Line

Both vertical and credit spreads are types of options trading strategies that an investor can use to create a neutral or limited risk trade. Beginner traders interested in Singaporean options trading are advised to use a reputable online broker from Saxo Bank and trade on a demo account before investing real money.

Pros and Cons of Money Lending

Online lenders can be a quick and handy way to get money. You can usually apply online in a matter of minutes and have the funds in your account within a few days. Working with a financial institution with physical locations, on the other hand, has its advantages. If you’re thinking about using an online-only lender, examine the following benefits and drawbacks first.Visit this link to become really good at money lending in Singapore.

1. Excellent price and terms

Many internet lenders provide unsecured personal loans, which you can use to pay off high-interest debt or cover a large expense. However, auto loans, mortgages, student loans, and other sorts of loans may be available online.Online-only lenders may be able to provide lower interest rates and fees than branch-based lenders by avoiding the overhead of running retail facilities. You could save money if you qualify for one of these low-interest loans instead of borrowing money elsewhere.

2. Compare multiple loan offers quickly

Comparing lenders and offers before taking a loan is one perk of looking for a loan online. You may read evaluations and comparisons to gain a general idea of each lender’s prospective interest rates, terms, loan amounts, fees, and other advantages and disadvantages. You can also acquire a preapproval or prequalification from a lender to get an idea of the loan amount, rates, and conditions you’ll get.

The disadvantages are as follows:

1. Financial institutions may be the best

If you don’t have excellent credit and a low debt-to-income ratio, it may be difficult to get approved for a loan from some of the top online lenders. If you try to take out a loan with your present bank or credit union, it may be easier. This is especially true if you have a lengthy history of keeping your money with the bank or credit union, or if you have taken out and repaid prior bank or credit union loans.

2. Lenders may contact you after you’ve taken out a loan

The snail mail, emails, and phone calls may not stop until you begin the application process with numerous lenders or compare offers through an aggregator. Even whether you take out a loan or decide not to borrow money, this could be true.While you can contact each lender and request to be removed from their marketing lists, this can be a lengthy and inconvenient procedure.

Therefore these are the advantages and disadvantages of money lending you should take care of while getting the money from some money lenders.