When should i buy option vertical spread?

Question

When i buy either put vertical spread, do i make money by hoping the stock will go down? Or do i want the stock to trade within my put spread range? For example, i buy XYZ $100 put option June for $1.00 and sell XYZ put $90 option at $0.50 when the stock is trading at $101. Should i hope that the stock stay between $90-$100 or should i hope for it to drop below $90.

Answer 1

You would want the stock to drop as much as possible with a ending stock price of $90 or below being optimum scenario. If the price stays at or above $100 you would loose your entire investment for sure as well if it is slightly below $100 by the way you have described your investment above.

Answer 2

<<<When should i buy option vertical spread?>>>

First, you should not trade options at all until you understand the risks and rewards associated with options, as well as the ways to control the risks. Second, I am assuming you did not ratio the spread. IOW, I am assuming the number of short options equals the number of long options.

As for when you would want to buy a vertical spread, it would be when

(1) you are either bullish or bearish on the underlying and

(2) you believe implied volatility (compared to the volatility the underlying will experience prior to expiration) is either too high or too low. If you do not have a forecast for implied volatility you should trade the underlying instead of options on the underlying,

If you are bullish, you want to buy a call vertical spread.

If you are bearish, you want to buy a put vertical spread.

If you believe implied volatility (IV) is too high, you want to sell the option with a strike closer to the underlying price and buy the option with a strike further away from the underlying price.

If you believe IV is too low, you want to sell the option with a strike further away from the underlying price and buy the option with the strike closer to the underlying price.

If the underlying is a stock use the current price of the stock increased by the risk-free interest rate until expiry less any dividends expected prior to expiry as the underlying price.

<<<When i buy either put vertical spread, do i make money by hoping the stock will go down?>>>

You don't make any money by hoping anything.

All else being equal, a long put vertical spread will increase in value if the underlying decreases in value.

All else being equal, a long call vertical spread will increase in value if the underlying increases in value.

<<<Or do i want the stock to trade within my put spread range?>>>

At expiration, a long put vertical spread will provide the maximum return in the underlying is below the lower strike price, have a smaller return if the underlying is between the two strike prices, and be worthless if the underlying is above the higher strike price.

At expiration, a long call vertical spread will provide the maximum return in the underlying is above the higher strike price, have a smaller return if the underlying is between the two strike prices, and be worthless if the underlying is below the lower strike price.

Assuming you want the maximum return you do not want the underlying trading between the two strikes at expiration.

<<<For example, i buy XYZ $100 put option June for $1.00 and sell XYZ put $90 option at $0.50 when the stock is trading at $101. Should i hope that the stock stay between $90-$100 or should i hope for it to drop below $90.>>>

Assuming you want to make as much as possible, you want it to drop below $90, but you would rather have it between $90-$100 than above $100.

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I strongly suggest you read at least one good book about options before trading them.