Options & derivatives
Option spread
Buying one option and selling another to define both the cost and the maximum outcome.
How it works
A vertical spread buys and sells options of the same expiry at different strikes. It reduces the premium paid and caps the possible gain.
Spreads make the risk explicit and bounded, which makes them considerably safer than naked positions — and considerably more complex to manage.
Related terms
- Call optionThe right to buy an asset at a fixed price before a set date.
- Put optionThe right to sell an asset at a fixed price before a set date.
- Strike priceThe price at which an option holder can buy or sell the underlying asset.
- AssignmentBeing required to fulfil an option you sold, because the buyer exercised it.
More in Options & derivatives
- Premium
- Option
- Protective put
- Notional value
- Intrinsic value (options)
- Spread betting
- In the money
- Implied volatility
All 30 Options & derivatives terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.