Spreads

What this unit covers

Learn how a basic spread, buying one option and selling another, caps both risk and reward compared with a single option position.

By the end you will be able to

• Explain how a spread offsets one premium against another by buying and selling options together.
• Identify why the same sold leg caps both the loss and the gain.
• Read a payoff diagram to tell a single-leg position apart from a spread.

How it starts: Two Traders, Same Stock Move

1. Two traders each hold an options position on the same stock.
2. The stock jumps far past what either trader expected at expiry.
3. One trader's profit keeps climbing, the other's stopped rising long ago, why?

Words you will meet

Spread

A position built by buying one option and selling another on the same stock and expiry.

Premium

The price paid to buy, or received to sell, an option.

Strike price

The fixed price at which an option can be exercised.

In this module: Practical Option Strategies

1. Payoff Logic
2. Spreads (this unit)
3. Straddles and Strangles
4. Defined-Risk Structures and Strategy Limitations