Course · Act I: Read the Chain · Chapter 5
Option spreads and defined risk
Bull call spreads and credit put spreads cap both the gain and the loss. A naked short option does not, which is how an account gets taken.
Key terms
- Bull call spread
- Long a call, short a higher-strike call. Max loss is the debit. Max profit is the width minus the debit.
- Credit spread
- You collect a net premium. A credit put spread sells a put and buys a lower-strike put, so the loss is capped.
- Defined risk
- A position whose worst case is known up front: the debit, or the width minus the credit.
- Naked option
- A short option with no hedge. A naked short call can lose without limit if the stock rises.
“Spreads and Defined Risk” is part of the full course: 6 puzzles on option spreads and defined risk. RocketCo is fictional, and none of this is a trade. Try this act’s free chapter, “Calls, Puts, and the Contract”, first.
“Spreads and Defined Risk” is in Act I: Read the Chain. 6 puzzles, unlimited retries.
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