[ Keep in mind that the specific trades referenced in this article were wprovided as educational examples from an article originally published April 14, 2006. They are not intended to be investment advice of any kind. For that you need to consult with a market professional who is familiar with, among other things, your investment objectives, your risk tolerance, and your available risk capital. Read part 1 here. ]
In this section we will discuss a couple of additional strategies, and also give a couple of examples in other markets. The two strategies that we have already discussed were the bull call spread and the bull put spread.
I hope you have a handle on the bull call spread (which together with a bear put spread, may be referred to as debit spreads) because we are going to take that concept one step further in the next example: a ratio call spread. Its construction is similar to the bull (or debit) call spread, but we sell more than one call. Typically, the perfect world example would be selling two out of the money calls and buying one closer to the money call. However, in our gold market example, to give us a reasonable (in my opinion) risk/reward ratio, we will sell three out of the money calls.
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