Options & Derivatives

Vertical Spread

Buying one option and selling another of the same type at a different strike.

A call spread is a bounded bullish bet: cheaper than the outright call, with profit capped at the strike difference.

Why use one. The long and short vega largely offset, so a spread is far less sensitive to implied volatility than an outright option. If you have a directional view but no volatility view, a spread expresses it more purely - and it is much less exposed to a vol crush.

The technique for any structure: draw the payoff diagram. Maximum loss, breakeven and expiry outcomes all become immediate, and are error-prone without it.

Full guide

Straddles, Strangles and Spreads

The standard option structures, what each expresses, and how to reason about their payoffs quickly in an interview.

Related terms

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