A lot of traders fancy the idea of buying, for example, 5 at-the-money calls on a $50 stock for $4 each (that’s a total of $2,000) instead of risking $5,000 buying 100 shares of the stock—especially in this wily market where stocks fall to zero seemingly every other day. Putting up less cash and having greater upside potential might sound pretty good. But, here’s the thing. You and I are not the only ones who know about the benefits of leverage. Lots of traders do. And they use it. They pay up for it by buying options instead of trading the stock, in turn making options more expensive. In options, you get what you pay for and you pay for what you get; in volatile markets you pay more when you buy options.

In volatile markets, traders need to adjust their trading to compensate for the high-priced options associated. One way is to learn how to trade a spread instead of relying on an outright long call or long put. An option spread involves buying an option and selling an option as part of a single trade. The idea is that if options are expensive to buy, then sell one too. Take that same $50 stock we were talking about earlier. A trader might buy 5 at-the-money (50-strike) calls for $4 while also selling 5 55-strike calls for say $1.50. The addition of the short call that creates the call spread means less capital at risk for the trade—only $3.50 per contract (here, $1,750). With this spread, upside potential is limited unlike buying a call outright. Though there is only $1,750 at risk instead of $5,000, the gains are capped at $1.50 per contract, or a total of $750. A trader looking for a really big move might just buying the high-priced call and accept the bigger loss potential. But for a trader looking for a small run up, this is often the smartest way to make a leveraged play.