traderplanetAggressive Option Spread Trading: Vertical Spreads with a Naked Leg

The great thing about trading options is there are no limits to the number of strategies, or degrees of risk and reward. Depending on how an option strategy is structured, it can be a simple lottery ticket (buy a cheap call or put outright), a limited risk range trade, a premium collection effort, or a “free” trade in which the trader accepts theoretically unlimited risk for the prospects of a directional bias without any cash outlay. In this article, we’ll focus on the latter.


FREE Option Trades!

People love the idea of free, but most fail to acknowledge that the word free is typically synonymous with the phrase “strings attached”. When retailers offer free merchandise, they generally require you to purchase something else or perform some sort of task. A free trade is no different.
When you hear a trader refer to a free option trade he is speaking of a scenario in which an option spread trader pays an equivalent amount of premium for the long options of a spread, relative to the premium collected for the short options. In other words, it is a trade that requires no cash outlay because the premium paid and collected for each leg of the spread resulting in a wash. The strings attached to this type of free venture, is theoretically unlimited risk beyond the strike price of the naked short options and a margin requirement. Let’s take a look at an example of a specific type of option spread that can often be executed at “even money” (a free trade).

Bull Call Spread with a Naked Leg

A bull call spread with a naked leg is essentially the practice of financing the purchase of a vertical call spread with the sale of a put. If you aren’t familiar with the term vertical spread, it is the purchase and sale of two call options in the same market and month, but with differing strike prices. The buyer of a vertical spread would be purchasing the option with a strike price closer to the current market price (the expensive option), and then selling the option with a distant strike price (the cheaper option). The buyer of a vertical spread pays money to enter the trade, but the seller of the spread collects a premium in exchange for risk.


Click here to continue reading this article on commodity option spread trading on

Futures and Options Trading Booksby Carley Garner

What People are Saying about Our Commodity Trading Books

Choosing a Futures Broker and Brokerage Service

Full-Service or Online Trading?

The decision to trade online or through a full-service commodity broker will undoubtedly make a large impact on your bottom line.

Learn More

A Fair Commission Rate vs. Low Commission

To look at commission rates objectively, we must understand the background of the futures industry and how brokerages accept risk for fees.

Learn More

Choosing a Commodity Brokerage Firm

Deciding on a commodity brokerage firm is a significant decision and shouldn’t be taken lightly. Not all traders and brokers are compatible.

Learn More

Choosing a Futures and Options Broker

Most traders in search of a futures broker are concerned primarily with trading platforms, commission, and quality guidance.

Learn More

The Truth about Futures Commission

The goal of futures trading should be to MAKE money, not SAVE it! Discount commodity brokers cut corners that cost their clients time & money.

Learn More

Commodities via Futures or ETFs?

A key difference to trading commodity futures over ETFs is leverage, but there is more to discuss, such as taxes, market hours, and efficiency.

Learn More