Verticals are versatile.

The world of options is complicated, and many individuals when they first begin exploring are dumbstruck by the multitude of strategies they can employ. For many, the simplest position is the naked call, the strategy employed is that the position’s cost (Strike Price Plus Premium) is less than the cost of share price as the option approaches expiration. This strategy is often used during lengthy bull markets and around probable earnings beat. (For more info check out one of the most popular stock market books of all time.)

The idea behind a vertical is twofold. The first is that it offers protection in case the position begins to depreciate. A bull vertical is a combination of staggering a long and short position at varied strike prices so as the position loses value, the short position will help hedge losses by covering any price below the long position.

This can be represented more clearly with a visual aid. The two parts of the line that are flat are present because the short position hedges losses against improbable bull moves where the long position hedges against improbable bear moves. On point A of the graph, the stock price is too low to cover the premium so there is a loss of value at the first kink in the graph. Point B, however, has not only covered the long position but the short position as well, so as the short position totals a value of 0 the long position has been maximized and so are profits.

My personal reason for using verticals is that they are a better way to use capital. Bull verticals require the buying and selling of staggered strike prices, and this causes them to be less expensive than a naked bull position. While the average investor asks themselves “How much can I gain?” I ask, “How much can I lose?” Verticals help not only protect me in case my position goes the wrong way, but they help protect me because sometimes it’s just not worth the premium.

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SOURCEPhoto: bigthink.com
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Spencer Lasday
Spencer is a Senior Economics Student at the University of Central Florida where he is currently focused on learning about public fiscal policy to continue pursuing his career in the public sector. He previously worked at the financial education platform, MoneyShow, that focuses on helping people manage their money into and through their retirement. He is passionate, enthusiastic, and dedicated to making sure that others shed their fear about money.