Combining two option legs instead of one lets you define exactly how much you can gain and exactly how much you can lose — trading away some of the uncapped upside from earlier lessons for a genuinely bounded position.
Every strategy so far in this track has used a single option, or an option against stock. A spread combines two or more options of the same type (all calls, or all puts) on the same underlying, at different strikes or expirations, to create a position with a precisely defined maximum gain and maximum loss.
The most common building block is the vertical spread: buying one option and simultaneously selling another of the same type and expiration, at a different strike. A bull call spread buys a lower-strike call and sells a higher-strike call — cheaper than buying the call alone (the premium collected from the short call offsets some of the cost), but with upside capped at the higher strike. A bear put spread does the mirror image with puts, for a bearish view with defined risk.
Hedging uses an option (or a spread) not to speculate, but to offset risk already present elsewhere in a portfolio. A protective put — buying a put against stock you own — acts like insurance: it costs a premium, but puts a floor under how much you can lose on the stock, no matter how far it falls. A collar combines a protective put with a covered call (from the previous lesson), often structured so the premium collected from the call roughly offsets the cost of the put — trading away upside above the call strike in exchange for a cheaper, or even free, floor below the put strike.
Stock at $100. Compare buying a single $100 call for $6 against a bull call spread: buying the $100 call for $6 and selling a $110 call for $2 (net cost $4).
| Stock at Expiration | Single Call P&L | Bull Spread P&L |
|---|---|---|
| $95 | -$6 (Max Loss) | -$4 (Max Loss) |
| $105 | -$1 | +$1 |
| $115 | +$9 | +$6 (Max Gain) |
| $130 | +$24 | +$6 (Max Gain, Still Capped) |
The spread costs less upfront ($4 vs $6) and has a smaller maximum loss, and it breaks even sooner ($104 vs $106) — but it sacrifices unlimited upside for a hard cap at $6 gain, no matter how high the stock eventually goes. Defined risk on both sides is the trade-off for giving up the single call's uncapped potential.
Enter the strikes and premiums for a long call and a short call — see the spread's cost, max gain, max loss, and breakeven.
Model: net cost = long premium − short premium. Max gain = (short strike − long strike) − net cost. Max loss = net cost. Breakeven = long strike + net cost. Requires short strike above long strike. Illustrative only, ignores commissions.
Answer all five, then hit "Check My Answers" to see how you did. Get one wrong? No problem — the explanation will show you exactly why.
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You've now covered all five lessons in this track — option basics, the Greeks, implied volatility, income strategies, and combining legs into spreads and hedges. One more Pro track remains: Macro & Cross-Asset Analysis.