Vertical Option Spreads

by David Jenyns on March 22, 2006

Vertical Option Spreads
We have demonstrated that vertical option spreads have intrinsic value, and that we can roughly determine their value by comparing stock price to strike prices. There is another relationship that can help investors determine value. That is the relationship that exists between corresponding vertical option spreads. When we use the term corresponding we mean the same month, the same strikes in the same stock. The only difference is between calls and puts. For example, the XYZ Sept. 30 35 vertical call spreads corresponding option spreads would be the XYZ Sept. 30 35 vertical put spread. Similarly, the ABC June 70 80 put spreads corresponding option spreads would be the ABC June 70 80 call spread.

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