Calculation and mechanics
The legs of a position describe its structure: call or put, long or short, strike, expiration and quantity.
Two puts with the same expiration and equal quantity, of which the higher strike is sold and the lower bought, form a bull put spread. A bull put spread below the current price together with a bear call spread above the price forms an iron condor. A short call together with a matching long stock position is a covered call.
A classic butterfly uses three strikes with a quantity ratio of 1:2:1 and equally wide wings. If the distances differ, it is called a broken wing butterfly.
Many common strategies can be recognised unambiguously from this structure. For complex or unusual combinations, however, several names may be possible. The structure can change during the term through a roll, the closing of individual legs or an assignment.
Distinction
The strategy describes the structure of the position, not its metrics. Max loss and sold premium are calculated from the same leg structure but are cash amounts.
Bull put spread and bear call spread are both defined-risk credit spreads. Their max loss depends on the respective net premium as well as on the strike width.
Related terms
- At-the-Money Straddle (ATM straddle)
- Max Loss (Maximum loss, option max loss)
- Sold Premium (Short premium, sold option premiums)
- Roll and Roll Efficiency (Rolling)
- Assignment (Option assignment)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.