Lesson 4 of 8
Spreads
Defined risk, defined reward. The training wheels of options.
Bull Call Spread
Buy a call at lower strike
Sell a call at higher strike
Reduces cost but caps upside
Bullish bet with defined risk
Bear Put Spread
Buy a put at higher strike
Sell a put at lower strike
Cheaper than buying a put alone
Bearish bet with defined risk
Buy AAPL $255 call for $10
Sell AAPL $265 call for $5
Net cost: $5 ($500 per contract)
Max profit: $10 spread width - $5 cost = $5 ($500)
Max loss: $5 cost ($500). That's it.
Max risk
$500
net debit paid
Max profit
$500
spread width - cost
Breakeven
$260
lower strike + cost
why spreads
Spreads are how most professional traders play options. You define your max loss before you enter. No surprises.
Check yourself
In a bull call spread, why do you sell the higher strike call?