TDD Options — Basic Option Tutorial

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Buying a vertical call spread involves the purchase of a lower strike call along with the sale of a higher strike call within the same contract month. Since the lower strike price should always be more expensive than the higher strike the buyer pays a premium. It is a bullish directional strategy with limited risk/limited reward. This spread has nearly the identical risk/reward characteristics as selling a vertical put spread. The price of the same strike call and put spread will combine to equal the price difference between the strike prices.

Breakeven point: future price = lower strike + premium paid.
Maximum loss = premium paid.
Maximum profit = the difference between strike prices — premium paid.
Margin requirements = none as all premium is paid up front.

In The Money: Lower strike price less than futures price.
At The Money: Lower strike price at or near futures price.
Out Of The Money: Lower strike price greater than future price.

Because there is both a purchase and sale of an option, characteristics may change as the futures price moves. If the call spread is ATM or OTM

Delta is positive. Higher prices help.
Vega is positive. Higher implied volatility helps.
Theta is negative. The passage of time hurts.

If the call spread is deep ITM

Delta is positive. Higher prices help.
Vega is negative. Higher implied volatility hurts.
Theta is positive. The passage of time helps.

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