Welcome to Option Spread Strategies, the spread half of the options chapter. A spread here means a vertical spread: buy one option and sell another of the same type, on the same futures, at the same expiration, differing only in strike. Every position in this unit is a bet on the gap between two strikes, and every answer comes down to two things: direction, and the maximum profit and loss.
Exam Weight: Part 1 (Market Knowledge) spans ~71% of the exam across Chapters 1-7 combined; the National Futures Association (NFA) does not publish per-unit weights.
What You'll Learn
In this unit, you'll cover:
- Call Bull Spreads: a bullish debit spread that profits as the gap between two calls widens toward the strike difference
- Call Bear Spreads: the mirror credit spread that profits as that same gap narrows toward zero
- Put Bull Spreads: a bullish credit spread built from two puts
- Put Bear Spreads: a bearish debit spread built from two puts, plus a side-by-side view of all four verticals in one master table
- Calendar Spreads: the option time spread that trades time decay instead of direction
- Arbitrage Spreads: the conversion and reversal, which lock in a near-riskless profit from a mispriced put-call parity
Why This Matters
This unit is almost entirely direction plus max-profit and max-loss formulas. One idea unlocks the four verticals: a vertical caps both the maximum profit and the maximum loss, because two strikes at one expiration can never be worth more than the distance between them and never less than zero. Debit spreads want that gap to widen; credit spreads want it to narrow.
To tell which leg costs more, ask what right it gives. A call is the right to buy, so a lower strike is the better deal and carries the larger premium. A put is the right to sell, so a higher strike is the better deal and carries the larger premium. Buying the more valuable leg makes a debit spread; selling it makes a credit spread.
The single biggest trap on the exam is confusing this option vertical with the futures calendar spread from the spreading chapter. A vertical caps both sides. A futures calendar (carrying-charge) spread caps only one. Keep the two in separate mental boxes and most of this unit becomes arithmetic.
Let's start with the call bull spread.