AdvancedMAD Academy0:45Derivatives

Capping Both Ends on Purpose

A vertical spread buys one option and sells another, which caps the gain, caps the loss and cuts the cost of being wrong on timing.

0:45 · 6 scenes

This lesson is part of a MAD Academy plan.

What the Lesson Covers

  1. 0:00Buy one option, sell another further out, and both ends get capped.
  2. 0:05The construction. Same expiry, two strikes. The sold option pays for part of the bought one.
  3. 0:14What it buys you. A lower cost, a defined maximum loss, and much less sensitivity to volatility.
  4. 0:23The arithmetic. Maximum gain is the strike width minus what you paid. Both numbers are known upfront.
  5. 0:32The cost of the cap. If the move is far larger than expected, you have already sold that part away.
  6. 0:40Use it when you have a view on the size of the move, not just direction.
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Educational content only. MadStockAlerts provides market commentary, research, and educational content. It is not personalized investment advice, and nothing here is a recommendation to buy or sell any security. Trading and investing involve substantial risk, including loss of capital. See the Risk Disclosure and Customer Agreement.
Educational content only. MadStockAlerts provides market commentary, research, and educational content. It is not personalized investment advice, and nothing here is a recommendation to buy or sell any security. Trading and investing involve substantial risk, including loss of capital. See the Risk Disclosure and Customer Agreement.
Capping Both Ends on Purpose — MAD Academy Training Video · MadStockAlerts