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For stock options, a vertical spread is a combination of buying and selling a put or a call. I could buy an AMZN call expiring next Friday with a notional valu
by quickthrowman 6y ago
For stock options, a vertical spread is a combination of buying and selling a put or a call.
I could buy an AMZN call expiring next Friday with a notional value of $300,000 (100 shares at 3000 strike) for $6,250. I could simultaneously sell an AMZN call with a notional value of $300,500 (100 shares at $3005) for $5,855. My net debit would be $395 with a max profit of $105 if AMZN closes above $3005 a share at expiration.
In the above I bought a call from someone with a notional value of $300,000 and someone else bought a call from me with a $300,500 notional value. I paid $395 for this setup that has a notional value of $600,500, but the most I could ever get back is $500, the spread between the strike prices.
- ggrrhh_ta 6y agoMany thanks, I think I can now understand the initial comment; in the derivatives market, the underlying value is decoupled from the actual money value of the transaction, and the latter is negligible with respect to the notional value.