Spreads Flashcards
When is a spread utilized?
Used when one wishes to profit from a limited market move, or when one wants to write contracts with lower risk
What is a spread?
It is the buying and selling (buy, sell) of either
- a Call OR
- a Put
What is a vertical price spread?
When strike prices are different
How do you stack call spread?
The lower call on top:
Buy 1 ABC Jan 50 Call @ $7
Sell 1 ABC Jan 60 Call @ $3
= $4 debit
How do you stack a put spread?
The higher PUT on top
Buy 1 ABC 60 put @ 7
Sell 1 ABC 50 put @ 3
What is the max loss, max gain, and BE for a Long CALL spread?
Max loss = debit
Max gain = strike price - debit
Breakeven = long strike + debit
What is a calendar spread? (aka Horizontal/time spreads)
- Time value is overvalued until option is about to expire
- Same strike price, different expiration dates
What is a diagonal spread?
Spreads where both price and time are different
When is a debit spread profitable?
When debit between premiums widens
When is a credit spread profitable?
When credit between premiums narrows
What is the way to remember the breakeven for spread?
You CALL LA to PUT the kids in HS
Calls - LOWER strike price, ADD dr/cr for calls
Puts - HIGHER strike price, SUBTRACT dr/cr for puts
What does a LONG CALL spread look like?
You buy a call at a LOWER strike price than you sell a call. For example:
Long 1 ABC Jan 55 Call
Short 1 ABC Jan 65 Call
What is a Bull spread?
The purchase and sale of either 2 calls or 2 puts with different strike prices and/or different expirations. Since it is a bull spread, it must be profitable in a rising market. (Long call spread and short put spreads)
What does a SHORT PUT spread look like?
You sell a put at a HIGHER strike price than you buy a put.
Short 1 ABC Jan 60 Put
Long 1 ABC Jan 50 Put
What is the max potential loss for a debit spread?
The maximum potential loss for a debit spread is the debit
