Options terminology can feel like a foreign language at first. You’ve already seen terms like long, short, in the money, out of the money, and intrinsic value. For the exam, you’ll also need to know the terminology used to name option spreads.
A spread is made up of two or more legs, but one option is always the dominant contract. Every leg affects the strategy’s risk and return, but one leg matters most for naming purposes. The dominant option is the one that names the spread.
You’ll see exactly why one option becomes dominant when you reach the math-based spread sections in the next two chapters.
There are three specific ways to identify the dominant option within a spread:
Let’s go through each one.
The dominant leg in 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 provided, the option with the highest premium is the dominant leg.
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 can be called three synonymous names:
Each name points back to the dominant long call:
Let’s check your understanding.
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 dominant leg is a short put. It’s a bull put spread because the dominant leg is bullish. It’s a credit put spread because the short put brings in more premium, creating a net credit (a net sale).
If premiums aren’t provided and you’re dealing with a vertical (price) spread, you can use the strike prices to identify the dominant option.
A vertical spread has:
Use these guidelines:
Even when premiums aren’t shown, the dominant option is still the more valuable contract. For calls, a lower strike is more valuable than a higher strike. A $20 call should be more expensive than a $30 call because:
The right to buy at a lower price is more valuable.
Let’s apply that to 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 dominant leg is a short call. It’s a bear call spread because the dominant leg is bearish. It’s a credit call spread because the short call is more valuable, creating a net credit (net sale).
Now compare that to put spreads.
For puts, a higher strike is more valuable than a lower strike. A $50 put should be more expensive than a $40 put because:
The right to sell at a higher price is more valuable.
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 dominant leg is a long put. It’s a bear put spread because the dominant leg is bearish. It’s a debit put spread because the long put is more valuable, creating a net debit (net purchase).
If premiums aren’t provided and you’re dealing with a horizontal (calendar/time) spread, you can use the expirations to find the dominant option.
A horizontal spread has:
The contract with the longer time to expiration is the dominant leg.
This ties directly to time value, which is the value an option has because time remains before expiration. More time generally means more value. For example, an option expiring in February is typically more valuable than an option expiring one month earlier in January. The buyer pays more for the extra time, and the seller receives more for taking on the obligation for longer. So, the option with the longest time to expiration is dominant.
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 dominant leg is a long call. It’s a bull call spread because the dominant leg is bullish. It’s a debit call spread because the long call is more valuable, creating a net debit (net purchase).
This video covers the important concepts related to naming spreads:
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