Vertical spread
Buying and selling the same contract type at different strikes and the same expiry. It caps the maximum gain in exchange for bounding the loss.
In the chapter
Combining contracts to choose your risk
From the same chapter
- Debit spreadThe vertical you pay for on opening. You need the underlying to move your way: time works against you.
- Credit spreadThe vertical you get paid for on opening. You win if NOTHING happens and time works for you — but you lose more than you took in if you are wrong.
- Long straddleA call and a put at the same strike. It wins on a big move in either direction; it loses if the market sits still.
- Long strangleLike the straddle but with separated strikes: cheaper to open and needing a bigger move to pay.
- Iron condorOne credit spread above and another below. You get paid for betting price stays in a range, with the loss bounded on both sides.
- ButterflyThree strikes: a bet that price ends pinned at the middle one. It costs little and hits rarely, but pays a lot when it does.
- Calendar spreadSame strike, different expirations. Sell the near one and buy the far one: a bet on time passing, not on direction.
- Covered callSelling a call while owning the shares. You take in premium and give up the upside above the strike.