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Core Options · OPT-09 · Core

Trend following with options

How should the structure match the expected move?

One concept per page · original written lesson · 364 prose words · authored, not installed or production-approved

What you will learn and prerequisites

Read first: Read a contract and its premium, Rights, obligations and expiration, Defined payoff risk is not margin, Read the whole multi-leg ticket

A trend thesis expects continuing directional progress, but still needs a plausible magnitude and duration. A long call, debit spread and credit spread do not express that thesis identically.

Choosing a structure first can force the forecast to justify a favorite trade.

Understand the mechanism

A long call retains convex upside but pays for premium and time. A bull-call vertical lowers the initial cost while capping upside. A put credit spread can profit without a large advance but has its own downside and assignment risks.

At-expiry geometry does not describe every interim IV or time response.

Walk through the process

State the trend's supporting evidence, the next obstacle and the failure condition. Choose enough time for the thesis and compare attainable reward with actual spread costs.

If price reaches the target early, reconsider what reward remains rather than holding only because the expiry date has not arrived.

Contract and decision boundary

Terminal examples use simultaneous intrinsic realization of all stated legs, before unspecified costs. Actual American exercise, assignment, early liquidation and broker handling can create different interim cash needs. These fictional comparisons are education, not orders or personalized investment advice.

A worked example

One fictional 100 call costs 4.20. A 100/105 bull-call vertical buys that call and sells a 105 call at 2.20, paying 2.00.

At expiry 103 the long call loses 1.20 while the vertical earns 1.00 per unit. At 112 the long call earns 7.80 and the vertical only 3.00. Neither is universally better: the capped structure fits a more limited target. The graph shows the vertical; the ticket lesson contains its leg-by-leg view.

Trend following with options—worked comparison

Vertical: Bull-call spread terminal P/L (USD)
Horizontal: Underlying at common expiry (USD)

Trend following with options—worked comparisonFictional data from the written example. The chart organizes the comparison; its shape is not a forecast. The complete numerical data are available below.-245-127-91092273459497.6101.2104.8108.4112
1. Fictional example
Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.
Read the graph as a data table
Complete graph data; original fictional observations or model calculations
Underlying at common expiry (USD)Fictional example
94-200
95-200
96-200
97-200
98-200
99-200
100-200
101-100
1020
103100
104200
105300
106300
107300
108300
109300
110300
111300
112300

What would invalidate the reading?

A trader expects a modest move but buys expensive short-dated uncapped premium, or expects an exceptional move but forgets the sold leg caps participation.

Check your understanding

Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.

What does the 100/105 debit vertical earn at expiry 103 with debit 2?

Reveal the worked answer

100 per standard spread before costs.

Intrinsic width achieved is three, minus debit two.

Critical risk question

What is the critical failure to avoid?

Reveal the worked answer

A trader expects a modest move but buys expensive short-dated uncapped premium, or expects an exceptional move but forgets the sold leg caps participation.

Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.

Takeaway

Return to the question: How should the structure match the expected move? State the observed facts, the assumptions and the failure condition separately.

Sources, assumptions and downloadable script

External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.

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