Unit 1 · Level 2 · Vertical spreads
Choosing strikes
Picking strikes for a credit spread is one dial with two ends: probability and payout. Sell far from the money and you win often; the credit is just coins. Sell near the money and the credit is fat. So is your chance of losing. Remember delta from League 1: a 0.20-delta short strike expires in the money very roughly 20% of the time. The market prices this dial fairly; there's no strike where you get both.
Free to play. No ads, no token, no account needed to start.
What you get asked
A far out-of-the-money credit spread wins maybe 90% of the time. What's the catch?
High win rate, tiny credit, occasional near-max loss. One bad month can return several months of income. Win rate is not expectancy. The Trading course drilled this.
Match the short-strike delta to the trade's character
Delta doubles as a rough probability gauge. Moving the dial changes the trade's personality, not its expectancy. The market prices each strike fairly.
An option's ___ is a rough proxy for its probability of expiring in the money.
It's an approximation, not gospel. Still, a 0.30-delta strike finishing in the money roughly 30% of the time is a solid mental default from League 1.
You move your short strike closer to the current stock price. What happens?
More premium always comes with more risk of being run over. Any strike combo that offered both would be arbitraged away within seconds.
If every strike is 'fairly priced', why choose one strike over another at all?
Strike selection is about fit, not edge: how confident you are, how much loss you can size for, how often you want to be managing losers. Pick the shape you can actually live with. 🐜
The rest of this unit
Trade some upside for a hard ceiling on loss. It's the spread trader's first tool.