A complete tactical dissection of vertical bull call spreads, bear put spreads, credit spreads, and straddles. Learn how to immediately spot debit vs. credit, determine max gain/loss without memorizing 20 formulas, and master the T-chart cash flow model.
| Strategy / Concept | Definition & Structure | Golden Rule | FINRA Exam Trap |
|---|---|---|---|
| Bull Call Spread (Debit) | Buy Lower Strike Call (more expensive), Sell Higher Strike Call (cheaper) | Wants market to go UP; Wants contracts to EXERCISE; Max Loss = Net Debit Paid; Max Gain = Width - Debit. | Candidates reverse strikes and calculate a credit spread instead. |
| Bear Put Spread (Debit) | Buy Higher Strike Put (more expensive), Sell Lower Strike Put (cheaper) | Wants market to go DOWN; Wants contracts to EXERCISE; Max Loss = Net Debit Paid; Max Gain = Width - Debit. | Confusing higher strike put with call debit spread. Remember: Puts are more expensive at HIGHER strike prices! |
| Bull Put Spread (Credit) | Sell Higher Strike Put (receive big premium), Buy Lower Strike Put (pay small premium) | Wants market to go UP or stay flat; Wants contracts to EXPIRE worthless; Max Gain = Net Credit; Max Loss = Width - Credit. | Thinking a Put spread must be bearish. A credit put spread is BULLISH because the trader wants the stock above the higher strike! |
| Long Straddle (Debit) | Buy 1 Call and Buy 1 Put on the same stock with IDENTICAL strike price and expiration | Wants BIG VOLATILITY in either direction. Two breakevens: Strike + Total Premium & Strike - Total Premium. | Candidates confuse a straddle (identical strike/expiry) with a combination (different strikes or different expirations). |
| Short Straddle (Credit) | Sell 1 Call and Sell 1 Put on the same stock with IDENTICAL strike price and expiration | Wants NO VOLATILITY (neutral market). Max Gain = Total Premiums received. Max Loss = UNLIMITED (due to short call). | Failing to realize that the short call creates unlimited upside loss risk. |
Max Gain + Max Loss = Difference Between Strike Prices (Spread Width)In any vertical spread, the two values must sum exactly to the spread width. If you find one, subtract it from width to get the other!
Breakeven = Lower Strike Price + Net Debit (or Net Credit)For ALL call vertical spreads (bull or bear), the breakeven is always calculated by adding the net premium to the LOWER strike price.
Breakeven = Higher Strike Price - Net Debit (or Net Credit)For ALL put vertical spreads, the breakeven is always calculated by subtracting the net premium from the HIGHER strike price.
Upper BE = Strike + Total Premium | Lower BE = Strike - Total PremiumA straddle has two strike-neutral break-even points equidistant from the strike price by the sum of both premiums.
An investor purchases 1 XYZ July 60 Call at 4.25 and purchases 1 XYZ July 60 Put at 2.75 when XYZ stock is trading at $60. To achieve profitability at expiration, what price levels must XYZ stock cross?
An options trader sells 1 DEF Oct 75 Call at 5 and sells 1 DEF Oct 75 Put at 4 when DEF is at $75. What is the trader's maximum potential gain, maximum potential loss, and market attitude?
A client establishes the following position when KOP stock is trading at $48: Buy 1 KOP Nov 45 Call at 5.50; Sell 1 KOP Nov 55 Call at 1.50. What are the client's breakeven, maximum potential profit, and maximum potential loss?
An investor executes a bear put spread by purchasing 1 ZTA Oct 70 Put for 6.50 and selling 1 ZTA Oct 60 Put for 2.00. At what market price does the investor break even at expiration?
An investor is moderately bullish on GHI stock trading at $82. The investor sells 1 GHI Nov 80 Put at 4.00 and buys 1 GHI Nov 75 Put at 1.50. What is the net credit received, maximum loss, and breakeven point?
An investor sells 1 ABC Jan 50 Call at 4.50 and purchases 1 ABC Jan 55 Call at 1.50. Under what market conditions does the investor realize the maximum gain?
An investor who establishes a debit vertical spread wants the difference between the option premiums (the spread) to:
An options trader sells a credit spread. The trader will maximize profitability if the spread between the two option premiums:
An investor purchases 1 XYZ May 50 Call and simultaneously purchases 1 XYZ May 55 Put. This strategy is classified as a: