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The Vertical Spread Mistake That Quietly Kills Your Returns
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ticker lesson
Breakdown
0:00lesson
Verticals as a strategy for all traders
- Verticals are best for beginners, intermediates, and advanced traders
- Defined risk and profit make them easy to evaluate
- Return on risk is a key metric
- Higher ratio between max profit and max loss is better
2:22lesson
Example of vertical spread with SPY
- Example: SPY put spread with 768 short put
- Buy 766, 38 days to expiration
- Take in 61 credit
- Max profit $60, max loss $138
4:46lesson
Impact of widening verticals
- Widening to four strikes increases credit to $118
- Risk increases to $281
- Max profit increases but ratio drops
- Ratio drops from 54% to 43%
4:47lesson
Risk vs. reward in verticals
- Max risk increases from $130 to $1500
- Profit-to-risk ratio drops from 54% to 28%
- Narrower legs offer better return on capital
- Long and short strikes closer together = better ratio
4:48lesson
Adjusting verticals for different traders
- Traders can adjust legs closer or further
- Narrower verticals are better for beginners
- Wider legs can be used in certain circumstances
- Always consider risk vs. profit
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