# Trend following with options

**OPT-09 · Core Options · Core**

**Lesson question:** How should the structure match the expected move?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

**Prerequisites:** OPT-F01, OPT-F02, OPT-F03, OPT-F04

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.

## Graph: Trend following with options—worked comparison

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

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/options-strategies/OPT-09.js` and displayed as an accessible table in the HTML lesson.

## 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

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

**Answer:** 100 per standard spread before costs.

**Why:** Intrinsic width achieved is three, minus debit two.

### What is the critical failure to avoid?

**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.

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

## Takeaway

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

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [OCC Options Disclosure Document](https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document)

- [OIC Strategy Reference](https://www.optionseducation.org/strategies/all-strategies-en)