By Bob Lang, Big Trends.com

Option traders looking to build profits in this slow-moving market should consider setting up some spreads, specifically vertical spreads.

This low volatility environment affords option traders the luxury to play the long side, especially because the market has had a big run for an extended time and is vulnerable to some selling. Do we want to get stuck if/when the market decides to correct?

Establishing a new long call play (or put play) can have some risk in this late stage of a market run. Option pricing is generally cheaper in a low-volatility environment, yet that is not always the case in certain circumstances. Spreading off the risk allows us to stay with and follow the trend.

A vertical spread is where you buy a strike and sell one (or more) strikes above it. This lowers actual cost but limits upside to the size of the spread. These are done within the same month as we buy and sell a call (or put) simultaneously.

Vertical Spread

For example, you might buy a call for $4 and sell a call 10 points away from that strike for $1.20, so you have paid $2.80 for the spread. This is less than the $4 that would have been paid if you just bought the straight call, but our maximum profit is limited to $7.20 (the 10-point strike difference minus the $2.80 cost).

We booked a huge winner last month with a Bed Bath & Beyond (NASDAQ: BBBY) vertical spread right before earnings hit (a 65% gain). We currently have a few of them out right now on some volatile names — but the charts are in good shape right here and until that changes we’ll proceed accordingly.

Bob Lang is a senior analyst and portfolio manager at BigTrends.com and manages the Grand Slam Options service.