Market Measures

Monday – Friday | 9:00 – 9:20a CT

Actual Risk of Vertical Spreads

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Vertical spreads are a smaller trade than naked positions and the narrower the spread the lower the buying power requirement. New traders may be misled by the lower buying power of tight vertical spreads relating to lower risk, but when comparing these differently sized trades, it’s important to normalize by this buying power amount. One way to compare these trades is to look at the return on capital.

The Study:
  • SPY
  • 2005 – Present
  • 45 Days to Expiration
  • 30 Delta Short Option Spreads Varying Widths:
    • 1, 5, 10 Wide
  • Compared Return on Capital Volatility

Even though tighter spreads appear to have less risk because of their lower buying power requirement, when comparing the return on capital volatility of varying width spreads we see that the wider the spread, the lower the return on capital volatility. Another way to reduce this volatility is to manage the trade at 21 days. When managing at 21 days the return on capital volatility is reduced by roughly 50% for all width spreads.

Market Measures More installments

See All »

Latest tastytrade Videos As of February 25

Most Shared From the last 30 days