As we discussed in a previous chapter, options terminology can feel like a foreign language. You’ve already learned terms like long, short, “in the money,” “out of the money,” and intrinsic value. For the exam, you’ll also need to know the specific terms used to name spreads.
A spread has two or more legs, but one option is always the dominant option. Every contract affects the strategy’s risk and return, but one leg matters most for identifying the spread. The key rule is simple:
You’ll see exactly why one option is dominant when you reach the math-based spread sections in the next two chapters.
There are three specific ways to determine the dominant option within a spread:
Let’s go through each one.
The dominant leg within a spread is the most valuable contract. An option’s premium is its market value: the more valuable the contract, the higher the premium. So when premiums are given, the dominant leg is the option with the highest premium.
For example:
Long 1 ABC Jan 60 call @ $7
Short 1 ABC Jan 70 call @ $2
The long call has the higher premium, so it’s the dominant leg. Since the dominant leg names the spread, this spread has three synonymous names:
Each name points back to the dominant long call:
Let’s see if you can name a spread.
An investor goes long 1 BCD Feb 25 put at $4 and short 1 BCD Feb 40 put at $11. What are the three names associated with this spread?
Can you figure it out?
The short put has the higher premium, so it’s the dominant leg. The names associated with this strategy are:
It’s a “short put spread” because the short put is the dominant leg.
It’s a “bull put spread” because the dominant leg is bullish.
It’s a “credit put spread” because the short put is more expensive, creating a net credit (net sale).
When premiums are provided, identifying the dominant option is straightforward: the option with the larger premium is always the dominant leg.
If premiums aren’t provided and you’re dealing with a vertical (price) spread, you can use strike prices to identify the dominant option. A vertical spread uses different strike prices with the same expiration.
Use these guidelines:
This still follows the same idea: the dominant option is the more valuable leg.
Let’s try a vertical call spread.
An investor goes short 1 MNO Jun 80 call and long 1 MNO Jun 95 call. What are the three names associated with this call spread?
The short call has the lower strike price, so it’s the dominant leg. The names associated with this strategy are:
It’s a “short call spread” because the short call is the dominant leg.
It’s a “bear call spread” because the dominant leg is bearish.
It’s a “credit call spread” because the short call is more expensive, creating a net credit (net sale).
Now compare that to put spreads.
One more vertical spread example, this time with puts:
An investor goes short 1 RTR Dec 120 put and long 1 RTR Dec 140 put. What are the three names associated with this put spread?
The long put has the higher strike price, so it’s the dominant leg. The names associated with this strategy are:
It’s a “long put spread” because the long put is the dominant leg.
It’s a “bear put spread” because the dominant leg is bearish.
It’s a “debit put spread” because the long put is more expensive, creating a net debit (net purchase).
If premiums aren’t provided and you’re dealing with a horizontal (calendar/time) spread, you can use expirations to identify the dominant option. A horizontal spread uses different expirations with the same strike price.
In a horizontal spread, the dominant leg is the contract with the longer time to expiration.
As we learned in a previous chapter, time value is the part of an option’s value that comes from having time remaining. More time until expiration generally means a more valuable contract. For example, an option expiring in February is typically more valuable than an option expiring in January because the holder is paying for extra time, and the seller is taking on the obligation for longer. So the option with the longest time to expiration is the dominant leg.
Let’s look at an example:
An investor goes short 1 TM Sep 55 call and long 1 TM Oct 55 call. What are the three names associated with this call spread?
The long call has the longer time to expiration, so it’s the dominant leg. The names associated with this strategy are:
It’s a “long call spread” because the long call is the dominant leg.
It’s a “bull call spread” because the dominant leg is bullish.
It’s a “debit call spread” because the long call is more expensive, creating a net debit (net purchase).
This video covers the important concepts related to naming spreads:
Sign up for free to take 18 quiz questions on this topic