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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
Spread
A combination of two options on the same underlying with different strikes or expirations.
Detail
A spread is an options strategy that combines the purchase and sale of two (or more) options on the same underlying. The difference may be in the strike price (vertical spread), expiration (calendar spread) or volatility (volatility spread). A spread limits the maximum profit and loss and often reduces the required margin. The most common are the bull call spread, bear put spread, iron condor or butterfly spread. Spreads are used to speculate on market direction, volatility or to obtain regular income.
A spread is a construction of multiple options that limits risk and often the required margin. A vertical spread (e.g., a bull call spread) uses two options with the same expiration but different strikes. A calendar spread uses the same strike but different expirations. There are also diagonal spreads (different strike and expiration). Spreads are flexible and allow you to create different return profiles depending on the expected market movement or volatility. Credit spreads (e.g., an iron condor) generate a premium with limited risk, suitable for income in a quiet market.
Optimal conditions
Spread is suitable if you expect limited market movement (range), decline or growth. For example, iron condor when expecting stagnation, bull call when expecting moderate growth. Suitable for limiting risk compared to the option statement itself.
Max profit
Limited – the difference between strikes (for a vertical spread) minus the premium paid (debit spread) or premium received (credit spread).
Max loss
Limited – for a debit spread, the maximum premium paid. For a credit spread, the difference between strikes minus the premium received.
Risks
Limited, clearly defined at entry. Risk depends on the type of spread. For example, with an iron condor, there is a risk of the market moving outside the specified range.
Greeks
Delta, Gamma, Theta – depending on the type of spread. For example, a credit spread profits from a decrease in volatility and time decay (Theta positive).
Variations
Vertical spread, Calendar spread, Diagonal spread, Iron Condor, Butterfly spread, Ratio spread.
Usage example
Bull call spread on SPY: buy call 400, sell call 410, same expiration. Speculation on growth with limited risk. Iron condor on QQQ: write put 340, buy put 330, write call 370, buy call 380 - income from premiums if it stays in the range.
DTE
Optional – spreads can be created for both short-term (7–30 days) and long-term (60–120 days) expirations.
IV (implied volatility)
High IV suitable for credit spreads (e.g. iron condor), low IV for debit spreads (e.g. bull call).
Premium
Debit spread (you pay a premium), Credit spread (you receive a premium).
Margin
Lower than the option statement itself. Margin is often limited by the strike difference.
Notes
Spread is a universal and flexible strategy for various market situations. It helps to limit risk and set clear profit/loss limits. Suitable for beginners who want to avoid unlimited risk.
Tags
spread, option spread, bull call spread, bear put spread, vertical spread, iron condor, butterfly, strategy
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