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Glossary of Terms and Strategies for Options Trading

Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.

Strategy

Beginner, Income

Call Credit Spread

Selling and purchasing call options on the same underlying and expiring with a different strike, with the aim of obtaining a premium (income).

Detail

A Call Credit Spread is a bearish-to-neutral options strategy where the trader sells a call option at a lower strike and buys another call with a higher strike, both with the same expiration.
The position results in a net credit when opened and profits if the underlying remains below the short strike.
The maximum profit is the net credit received. Risk is limited to the difference between the strikes minus the credit.

The Call Credit Spread (also known as Bear Call Spread) is a defined-risk strategy that benefits from sideways or slightly bearish price action.
The trader collects premium by selling a call closer to the money and protects the position by buying a further OTM call.
If the underlying price stays below the short strike at expiration, both options expire worthless and the trader keeps the credit.
The bought call limits losses in case the underlying rises above the short strike.
This strategy is commonly used when the trader expects resistance at a certain level and wants to profit from time decay and stagnant movement.

Optimal conditions

Best used in neutral to slightly bearish markets.
Ideal when the underlying is approaching resistance or appears overbought.
Works well in high IV environments where calls are expensive, enhancing the credit received.

Max profit

The maximum profit equals the net premium received when opening the position.

Max loss

The maximum loss is limited to the difference between the strike prices minus the net credit received.

Risks

The main risk is that the underlying breaks above the short strike and approaches or exceeds the long call.
If the price rallies, the position can result in a full loss.
Management may be needed if the price rises quickly or implied volatility increases significantly.

Greeks

Delta: Slightly negative – benefits from a stable or declining price.
Theta: Positive – time decay works in favor of the trader.
Vega: Negative – falling volatility improves performance.
Gamma: Negative – risk increases if price moves quickly toward the short strike.

Variations

Bull Put Spread (bullish), Bear Call Spread (bearish), Iron Condor (combination of 2 credit spreads).

Usage example

Stock XYZ is trading at $95 and you expect it to stay below $100 over the next few weeks.
You sell 1x call at strike 100 for $3 and buy 1x call at strike 105 for $1.
Net credit = $2.
If XYZ stays below $100 at expiration, you keep the $2 credit.
If it rises above $105, your max loss is $5 – $2 = $3.

DTE

Usually 30–45 days, ideally with a fast time decay (Theta).

IV (implied volatility)

Suitable for higher IV (higher premium per listing). A decrease in IV helps the spread value.

Premium

Credit (you receive a premium).

Margin

Margin required equals the maximum potential loss (strike width minus credit received).
Defined-risk position, so margin is limited and known upfront.

Notes

Excellent strategy for traders who believe the price will stay below resistance.
Profits from time decay and overpricing of OTM calls.
Suitable for range-bound setups or as part of income-generating trades.

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