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I wanted to get into options trading and have been watching a couple of tutorials.All was well until I hit short vertical spreads.I used skyview trading resources for this.

https://www.youtube.com/watch?v=6_0SbRaHv1U&t=344s

So I have a few questions

1 Scenario 1 [when stock price is above the the strike price of the call sold[1]

Call sold -100 Call bought - 105 Stock price - 130

So we make a loss in this as in order to close we have to buy back the stock at much greater price.This made sense

2 when the stock price is 101

Here the video says that the spread will have a value of 1.But how?Arent we making a total loss here.

Also cant we minimize our risks by having the strike prices of the calls bought and sold in the spread be as close as possible?

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  • Can you transcribe the relevant portion? I don't feel like watching a 10 min video just to answer your question...
    – 0xFEE1DEAD
    Jun 17, 2023 at 14:47

3 Answers 3

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Call sold -100 Call bought - 105 Stock price - 130

So we make a loss in this as in order to close we have to buy back the stock at much greater price.This made sense 2 when the stock price is 101

Here the video says that the spread will have a value of 1.But how?Arent we making a total loss here.

If you sell a 100c then you are agreeing to sell shares (typically 100 shares) of the underlying if assigned. If at option expiration the stock is at 101, then you will be assigned. You'll sell shares for 100, and then you'll be short shares that you'd have to buy back at the current price of 101. In practice, you shouldn't let spreads like this expire (depending on account/broker you might not even be able to let them run to expiration).

If you buy a 105c and at expiration the stock price is 101, then that call is worthless at expiration.

Combining the two someone might say the spread has an intrinsic value of 1, that's roughly how much you'd have to pay to close the spread on the expiration date. Your profit or loss will be the difference between the credit you received when you sold the spread and how much you have to pay to close it out.

It might be worthwhile to find some other well-rated videos on the topic or re-watch the linked video, as there are a number of foundational concepts that should be well-covered and well-understood before diving into options trading.

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  • I can only second the advice to learn a lot about options before you actually trade them. Even more importantly, practice with trial accounts. If not, you will likely end up buying something where the leverage, direction and risk is completely misunderstood. It may even be worth to als yourself why you want to get into options trading. If the answer is that you think you can make more money (easier /quicker) money, empirical evidence is not in your favour.
    – AKdemy
    Jun 17, 2023 at 17:35
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Here the video says that the spread will have a value of 1.But how?Arent we making a total loss here.

You sold the call. So you're short the spread, i.e. you profit or loss is opposite that of the option. The spread has a value of 1, so you're losing 1. I'm not clear on what's confusing you here.

Also cant we minimize our risks by having the strike prices of the calls bought and sold in the spread be as close as possible?

The minimum risk is in not participating in the options market at all. Anything past that is just deciding which risks you're most willing to accept. Having the strike prices closer means that the maximum loss per contract is smaller, but is also means that the maximum profit is smaller, as the premium spread is smaller.

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When you sell a spread, your max loss is the high strike - low strike times position size.

Sure, you can limit your losses by having the strikes as close as possible, but you won't net much premium doing so.

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