Defined debit call spread on a health-insurer worksheet

A health-insurance regime as the case setting

The options case is framed around health-care insurance providers after a national coverage law expanded mandatory insurance. It is not framed around clinic operators or device makers.

TradersWeek editorial: read that policy regime as a worksheet for defined-risk construction. Begin with a long-dated directional call, finance it into a vertical debit, and score entry, hold, and abstention by net debit and the expiration reward cap. Keep a long put on the same sheet as the bearish defined-risk counterpart so a bullish spread is never graded without its opposite.

Financing the long call into a vertical debit

A vertical spread is built by pairing a purchased option with a sold option of the same type and expiration a few strikes farther out of the money, so the short premium reduces the net debit. That same-expiration pairing is the vertical debit: one option bought, a farther out-of-the-money option of the same type sold, and a smaller cash outlay than the long leg alone.

An option spread, in this worksheet, is the multi-leg position that trades one contract against another to change debit, maximum loss, and the expiration reward ceiling relative to a single option. Replacing shares with an unfinanced long-dated call was treated as incomplete because the single long call still left a larger debit than the vertical.

The worked January 2016 debit

The worked example is a January 2016 call debit with a long 115 strike and a short 125 strike, shown at a net cost of 268 dollars before slippage and commissions. The same out-of-the-money long calls without the short leg were described as costing more than 500 dollars.

A long-dated option was defined as one with at least nine months to expiration and was the tenor used for a case lasting nearly a year. That tenor is what the financed call spread used.

Net debit, maximum loss, and the reward cap

Held to expiration, the largest loss on the debit spread equals the net amount paid for the spread. For a debit spread held to expiration, that maximum loss equals the net premium paid, excluding slippage and commissions.

Expiration reward stops increasing once the underlying is above 125, because further gains on the long 115 calls are offset by the short 125 calls. The short call strike is the expiration reward cap.

The long put stays on the sheet

A long put is a purchased put whose largest loss is the premium paid and whose value rises if the underlying falls. TradersWeek editorial: it is the single-leg defined-risk opposite on this worksheet, used to stress-test the bullish debit so the call spread is not scored in isolation.