Spread trading is defined as opening a position by buying and selling same type of option (ie. Call or Put) at same time. For example, if you buy a call option for stock XYZ, and sell another call option for XYZ, you are in fact spread trading.

By buying one option and selling another, you limit your risk, since you know exact difference in either expiration date or strike price (or both) between two options. This difference is known as spread, hence name of this spread treading technique.

VERTICAL SPREADS

A Vertical Spread is a spread where 2 options (the one you bought, and one you sold) have same expiration date, but differ only in strike price. For example, if you bought a $60 June Call option and sold a $70 June Call option, you have created a Vertical Spread.

Let's assume we have a stock XYZ that's currently priced at $50. We think stock will rise. However, we don't think rise will be substantial, maybe just a movement of $5.

We then initiate a Vertical Spread on this stock. We Buy a $50 Call option, and Sell a $55 Call option. Let's assume that $50 Call has a premium of $1 (since it's just In-The-Money), and $55 Call has a premium of $0.25 (since it's $5 Out-Of-The-Money).

So we pay $1 for $50 Call, and earn $0.25 off $55 Call, giving us a total cost of $0.75.

Two things can happen. The stock can either rise, as predicted, or drop below current price. Let's look at 2 scenarios:

Scenario 1: The price has dropped to $45. We have made a mistake and predicted wrong price movement. However, since both Calls are Out-Of-The-Money and will expire worthless, we don't have to do anything to Close Position. Our loss would be $0.75 we spent on this spread trading exercise.

Scenario 2: The price has risen to $55. The $50 Call is now $5 In-The-Money and has a premium of $6. The $55 Call is now just In-The-Money and has a premium of $1. We can't just wait till expiration date, because we sold a Call that's not covered by stocks we own (ie. a Naked Call). We therefore need to Close our Position before expiration.

So we need to sell $50 Call which we bought earlier, and buy back $55 Call that we sold earlier. So we sell $50 Call for $6, and buy $55 Call back for $1. This transaction has earned us $5, resulting in a nett gain of $4.25, taking into account $0.75 we spent earlier.

What happens if price of stock jumps to $60 instead?

Small-business owners often have trouble obtaining affordable health insurance coverage for themselves and their employees. Where SBOs are in need, dishonest predators will invariably come out of woodwork to take unfair advantage, which is one reason why health insurance fraud is a growing problem in this country.

Illegal Health Insurance Schemes

Health insurance fraud usually involves group health plans sold to employers for their employees.

Posing as legitimate-sounding but phony unions or trade groups, or falsely claiming backing of big insurers, fraudulent insurers prey on employers who are badly in need of health insurance by, for example, offering low-cost health care coverage—as much as 50% or more below going rate. Some even say they’ll issue coverage regardless of health conditions, and with little or no underwriting.

Companies and individuals behind these schemes are seldom licensed in states in which they do business, and they operate by recruiting unwary local agents to sell these fraudulent products to trusting clients. By putting out false information, undercutting rates and competing unfairly with licensed carriers, unauthorized insurance scams are bilking their customers, and constitute a serious financial hazard to general public.

Here’s set up…

Legitimate v. Illegitimate “MEWAs”

Under federal law, self-insured or fully insured “Multiple Employer Welfare Arrangements”--MEWAs—are plans created by two or more employers to furnish employee benefits, such as health insurance. However, unscrupulous entrepreneurs have found MEWAs to be a handy way to market worthless health care benefits to employers for their employees. Here’s how…

While legitimate MEWAs permit individual employers to self-insure health coverage for their own employees, any plan providing coverage to more than one unrelated employer, must be licensed by state. Yet dishonest promoters present MEWAs to employers as employee benefit plans covered by Employee Retirement Income Security Act (ERISA), which (they say) exempts them from expensive state licensure, reserve, and other regulatory requirements and allows them to offer health care and other coverage at such low rates.

It just ain’t so, and states cannot allow health care coverage to become a con game played on unsuspecting by unscrupulous. Yet many of these phony insurers are domiciled outside United States, further complicating false information illegitimate MEWA promoters give employers, and their almost inevitable failure to pay claims.

Other Causes for Concern

The primary legal issue involving unauthorized insurers is erroneous claim that they’re free from state insurance regulation, but other issues are cause for concern. These include:

• Inadequate financial backing, and lack of a federal guaranty fund covering unpaid claims.

• Financial impact on businesses that have fallen for this fraudulent scheme, and future insurability of MEWA-covered employee.