What you will learn
- Vertical spreads
- Protective options
- Covered positions
- Calendar exposure concepts
Vertical spreads
A vertical spread combines options of the same type and expiry at different strikes. For a simple debit call spread, the purchased lower-strike call is offset by a sold higher-strike call. State the net premium and equal contract units.
Protective options
Protective options are evaluated alongside the exposure they are intended to modify. The protection may involve premium cost, basis differences and expiry mismatch. A hedge label does not eliminate these trade-offs.
Covered positions
Covered positions pair an option obligation with another holding, but coverage depends on quantity, underlying and contractual treatment. The combined position can still lose substantially; covered does not mean risk-free.
Calendar exposure concepts
Calendar structures combine expiries and therefore involve different time and volatility sensitivities. A terminal payoff at one expiry may leave another option open. Do not collapse the structure into a single-expiry diagram without explaining the remaining leg.
Worked example
Buy a 100 call and sell a 110 call for net debit 4, equal units. At expiry reference 108, spread payoff is 8 and profit 4. At 115, payoff is capped at 10 and profit 6 before costs.
Try it yourself
Calculate the spread's expiry profit at 95 and at 103. Identify the maximum loss in this simplified fully matched expiry example.
Show the worked solution
At 95, both calls have zero payoff and profit is −4. At 103, payoff is 3 and profit is −1. The net debit 4 is the maximum terminal loss under the simplified matched-contract assumptions, before costs and operational complications.
Apply this to your course project
Produce payoff and scenario tables for a defined-risk illustrative spread.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.