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intro to spreads

Short Call Vertical

Analyzing the risk profile of a short call vertical
Short call verticals are a _______ strategy.
Bearish
Correct! Short call verticals profit fastest when the underlying price declines. They are a bearish strategy.
Safe
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Bullish
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Neutral
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You sold the 50/60 short call vertical for $4.75. What is your maximum potential profit and loss?
$4.75P, $5.25L
Correct! The most you can make on a short call vertical is the amount you sell it for: $4.75. Subtract your credit from the $10 width to find your max loss: $10 - $4.75 = $5.25.
$5.25P, $4.75L
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$5.25P, $10L
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$10P, $5.25L
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True or false: OTM short call verticals have a high probability of success.
True
Correct. By placing your strikes OTM, you are raising your POP above 50% – sometimes as high as 70% or more. Doing so, however, also lowers your maximum profit potential and increases your total risk.
False
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Which of these short call verticals carries the largest notional risk?
A 23/24 spread for $0.55 credit
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A 30/35 spread for $1.00 credit
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A 50/60 spread for $2.75 credit
Correct! In this scenario you are selling a $10-wide spread for $2.75, giving you a max loss potential of $7.25. This is calculated by subtracting your credit from the width of the strikes: $10 - $2.75 = $7.75.
A 50/60 spread for $4.10 credit
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XYZ is trading for $50. Which of these short call verticals will bring in the most extrinsic value?
50/60
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45/60
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50/65
Correct! Since XYZ is trading for $50, you know the 50 strike will carry the most extrinsic value. Option 1 also sells the 50 strike, however this 50/65 spread is wider. Wider spreads bring in larger credits as compensation for greater risk.
40/50
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You sold a $10-wide call vertical for $3.75. What is your approximate POP (probability of profit)?
30.0%
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37.5%
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62.5%
Correct! You can approximate your odds by dividing your max risk by the width of the strikes. Your max risk is calculated by subtracting the credit from the strike width: $10 - $3.75 = $6.25. Next, divide $6.25 by $10 and multiply by 100%: ($6.25 ÷ $10) × 100% = 62.5%
70.0%
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You are trading XYZ and decide to sell a 35 delta call for $0.90 and buy the 10 delta call against it for $0.10. What is the net extrinsic value of this short call vertical?
-$0.10
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$0.10
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$0.80
Correct! You collected $0.90 for the short leg, and paid $0.10 for the long leg. This results in a net collection of $0.80 extrinsic value.
$0.90
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Would you rather your short call vertical expire ITM, ATM, or OTM?
ITM
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ATM
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OTM
Correct! A short call vertical expiring OTM would be at maximum profit.
Calls don't expire
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intro to spreads