← IntermediateLesson 8 · 3:43
What is a vertical spread?
Summary
You can build a vertical spread from two options of the same kind and expiry: one bought and one sold at different strikes. You can explain why the sold leg makes the bought one cheaper and caps the line, and find the most you can lose and make.
Key terms
- vertical spread
- Two options of the same kind and expiry, one bought and one sold, at different strikes.
- leg
- One of the options that together make up a spread or other combined trade.
- strike
- The price at which an option lets you buy (a call) or sell (a put) the stock.
Check yourself
Answer each question to see why the right answer is right.
1. Which trade is a vertical spread?
2. You buy the $100 call for $3.45 and sell the $110 call for $0.61. XYZ ends below $100. What is your result?
3. In the same spread, why is the most you can make $716?
4. XYZ runs to $120. How does the spread compare with the $100 call bought alone?
5. Why does selling the $110 call make your $100 call cheaper?
Finished the video and the quiz? .