Compare strategies with one example¶
Same stock. Same story. Different structures. The point is to see how wins and losses change — not to crown a winner.
Not financial advice
Hypothetical numbers for education. Fees, dividends, and early assignment ignored. Not a recommendation.
The shared story¶
Stock XYZ trades at $100.
You will look at two endings a few weeks later:
| Ending | Stock price | Story |
|---|---|---|
| Up case | $110 | Quiet grind higher |
| Down case | $88 | Sharp selloff |
We compare one contract where options appear (100-share multiplier). Share examples use 100 shares so dollars line up.
Approximate option prices used in the story (illustrative, not live quotes):
| Contract | Premium (per share) |
|---|---|
| $100 call | $3.00 |
| $100 put | $2.50 |
| $95 put (further OTM) | $1.00 |
| $105 call (further OTM) | $1.20 |
Approach A — Buy 100 shares¶
Capital tied up ≈ $10,000.
| Ending | P&L |
|---|---|
| Up to $110 | +$1,000 |
| Down to $88 | −$1,200 |
Risk is large relative to a small options premium. Reward is one-for-one with the stock.
Approach B — Long $100 call (pay $3)¶
Cost ≈ $300. Max loss = $300. Unlimited upside in theory.
| Ending | Approximate P&L |
|---|---|
| Up to $110 | Call worth ≈ $10 → +$700 |
| Down to $88 | Call worthless → −$300 |
Compared with shares: less capital, capped loss, needs a move to win big.
Approach C — Naked short $100 call (collect $3)¶
Max profit = $300. Loss grows as the stock rises. [verified] unlimited for uncovered calls.
| Ending | Approximate P&L |
|---|---|
| Up to $110 | Short call loses ≈ $7/share after credit → −$700 |
| Down to $88 | Call expires worthless → +$300 |
You “win” the quiet down/flat path — and get hurt when the stock rips. Risk management category: this is undefined upside risk unless you add coverage.
Approach D — Covered call (100 shares + short $100 call at $3)¶
You own the shares and sell the call.
| Ending | Approximate P&L vs $100 entry |
|---|---|
| Up to $110 | Shares +$1,000, call −$700 net of $300 credit → about +$600 (upside capped) |
| Down to $88 | Shares −$1,200, call +$300 → about −$900 |
Category: collateral / coverage. You improved the down case vs naked shares a little (kept the call premium) and capped the up case.
Approach E — Cash-secured put (short $100 put, hold $10,000 cash)¶
Collect $2.50 ($250). Prepared to buy shares at $100.
| Ending | Approximate P&L |
|---|---|
| Up to $110 | Put expires → +$250 |
| Down to $88 | Effective buy near $97.50; unrealized mark roughly −$1,000-ish vs that basis (you now own risk like a shareholder) |
Category: collateral. Win is limited to the premium; loss looks like stock ownership if assigned.
Approach F — Put credit spread (defined-risk sell)¶
Sell $100 put for $2.50, buy $95 put for $1.00 → net credit $1.50 ($150).
| Ending | Approximate P&L |
|---|---|
| Up to $110 | Both puts OTM → keep credit → +$150 |
| Down to $88 | Through the spread → near max loss → about −$350 |
Why max loss is bigger than max profit here¶
That is normal for many credit spreads. You are selling a higher-probability outcome for a limited reward. The long put is insurance: it stops the naked-put disaster, but insurance costs premium, so the leftover credit is smaller than the width.
This is a feature of the structure, not a broken example. If you want a structure where the best case can exceed the cash you risked, look at debit spreads next.
Approach G — Call debit spread (defined-risk buy)¶
Buy $100 call for $3.00, sell $105 call for $1.20 → net debit $1.80 ($180).
| Ending | Approximate P&L |
|---|---|
| Up to $110 | Spread worth about $5 → about +$320 |
| Down to $88 | Spread worthless → −$180 |
Here max profit ($320) is larger than max loss ($180). You paid for a directional ticket with a ceiling. You need the stock to move; time decay works against you more than in a credit spread that stays safe.
Side-by-side snapshot¶
| Approach | Up to $110 | Down to $88 | Max loss known? | Max gain vs max loss feel |
|---|---|---|---|---|
| 100 shares | +$1,000 | −$1,200 | No hard cap (stock → 0) | Symmetric with stock |
| Long call | +$700 | −$300 | Yes ($300) | Gain can exceed premium |
| Naked short call | −$700 | +$300 | No (upside) | Gain capped; loss can dwarf credit |
| Covered call | ~+$600 | ~−$900 | Stock risk remains | Upside capped |
| Cash-secured put | +$250 | Stock-like loss if assigned | Large if crash | Gain capped at premium |
| Put credit spread | +$150 | ~−$350 | Yes ($350) | Often loss > gain by design |
| Call debit spread | ~+$320 | −$180 | Yes ($180) | Often gain > debit if right |
What to take away¶
- Learn options mechanics first (previous pages).
- Risk management is a menu: sizing, coverage, defined structures, portfolio caps, event filters.
- Credit spreads are one defined-risk item on that menu — attractive when you want a known max loss and are willing to accept limited reward.
- Debit spreads flip the risk/reward shape; they are not “better,” just different.
- Spruce’s later operating bias toward credit spreads is a policy choice for computable risk — not a claim that every trader must start there.
What to do next¶
- Credit-spread payoffs — deeper math now that you have context
- Defined-risk credit spreads — why Spruce prioritizes them for ops
- Risk policy proposal — portfolio-level numbers
Sources¶
- Investopedia — Vertical spread
- OCC uncovered-writing risk themes
- Sources index
Not financial advice. Verify broker rules yourself.