Unit 1 · Level 2 · Vertical spreads
Verticals: unit review
Buy one, sell one, same expiry. Pay a debit to bet on movement; collect a credit to bet against it. Max profit, max loss, and breakeven are all fixed at entry: width − debit for debit spreads, width − credit as the max loss for credit spreads. Strike choice is a fair trade between how often you win and how much you win. That's the whole unit.
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What you get asked
Which statement correctly separates debit and credit spreads?
Both are defined-risk boxes. The difference is who pays whom up front, and that decides what you need the stock to do (move, or stay put).
Match the structure to when it earns its maximum
Each vertical maxes out when the stock ends on your side of the short strike. It bottoms out past the leg you bought for protection.
For any credit spread: max loss = strike width minus the ___ received.
The credit softens the worst case. A €5-wide spread sold for €1.50 can lose at most €3.50 per share. You know that number before entering.
Why is 'this spread wins 85% of the time' NOT enough reason to trade it?
An 85% win rate with wins of €1 and losses of €8 loses money. Multiply probability by payoff. It's the same expectancy maths the Trading course used for stop-losses.
The deep reason advanced traders reach for verticals instead of single options?
Defined risk turns options from lottery tickets into sizeable, repeatable positions. You can't compound what you can't size. 🐜
The rest of this unit
Trade some upside for a hard ceiling on loss. It's the spread trader's first tool.