Which quantities must agree for the simple five-point vertical payoff?
Reveal the worked answer
Correct signed quantities, common expiry, matching underlying and multiplier.
The formula assumes those contract relationships.
Core Options · OPT-22 · Core
The complete strategy checklist
What must be understood before discussing execution?
What you will learn and prerequisites
- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.
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 complete option idea states the market question, exact contracts, premium, maximum terminal exposure where defined, interim failure cases and exit logic. It also identifies what is unknown.
A checked list is useful only when each answer has real content.
Understand the mechanism
For multi-leg trades, quantity signs, multiplier and expiries come before payoff formulas. Same-expiry spreads have terminal identities under explicit assumptions; calendars require revaluing the still-live leg. Defined terminal loss does not remove assignment and execution considerations.
State IV and time expectations separately from direction.
Walk through the process
Read a finished ticket aloud. Reproduce one favorable, one flat and one adverse example. Identify fees and executable prices. Explain what happens if nothing occurs, IV changes or the thesis is delayed.
A no-trade decision is appropriate when a necessary input is missing. The checklist does not require finding a structure for every day.
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
Take the fictional 100/105 bull-call ticket: buy one 100 call for 4.20, sell one 105 call for 2.20, same expiry and 100 multiplier. Debit is 200; terminal maximum profit 300 and loss 200 before costs.
At 102 terminal P/L is zero, at 100 or lower −200, at 105 or higher +300. The graph reproduces those exact numbers. A reader unable to explain the sold leg should revisit the ticket before considering more complex structures.
The complete strategy checklist—worked comparison
Vertical: Bull-call terminal P/L (USD)
Horizontal: Underlying at common expiry (USD)
1. Fictional example
Read the graph as a data table
| Underlying at common expiry (USD) | Fictional example |
|---|---|
| 94 | -200 |
| 95 | -200 |
| 96 | -200 |
| 97 | -200 |
| 98 | -200 |
| 99 | -200 |
| 100 | -200 |
| 101 | -100 |
| 102 | 0 |
| 103 | 100 |
| 104 | 200 |
| 105 | 300 |
| 106 | 300 |
| 107 | 300 |
| 108 | 300 |
| 109 | 300 |
| 110 | 300 |
| 111 | 300 |
What would invalidate the reading?
An incomplete specification can make a beautiful graph describe the wrong instrument. Missing multiplier, expiry mismatch or ignored short-leg obligation is not a cosmetic issue.
Check your understanding
Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.
What is the critical failure to avoid?
Reveal the worked answer
An incomplete specification can make a beautiful graph describe the wrong instrument. Missing multiplier, expiry mismatch or ignored short-leg obligation is not a cosmetic issue.
Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.
Return to the question: What must be understood before discussing execution? 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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