Three loss bounds: debit spreads, stops, and protective puts

Three bounds that do not fail the same way

A stop-loss is a price, time, or percentage exit meant to cap open risk before and during a trade. It does not bind a gap that prints through the trigger. A protective put is a long put held against a directional long so a decline that skips a stop still has a contractual floor. Residual exposure is the put premium plus the distance from the long price down to the put strike.

An option spread in this workflow is a two-leg vertical that pays a defined debit for a defined remaining width. The legs can be closed together or unbundled if only one still has salvageable time value.

A debit paid for remaining width

In the debit-spread example, a 95 call bought at 1.50 against a 100 call sold at 0.75 produced a 0.75 net debit. That 5-point width minus the 0.75 debit left 4.25 of remaining defined upside, which the example treated as an aggressive geometry of almost 6-to-1.

The stated screen for bull call spreads was a 2-to-1 or 3-to-1 remaining-width-to-debit shape, with exits based on elapsed time or a percentage loss. One time-based exit example bought a call spread with six months of life and abandoned it after one or two months if the underlying had not started to rise.

Expire unused or unbundle the short

The debit is the net cash paid to open a vertical. If both options expire unused, that debit is the realized loss. If those options had only days or a week of life and the bullish case had failed, the described close was to take no further action and let both contracts expire unused, realizing the 0.75 debit as the loss.

If usable time remained, the short 100 call could be closed on its own while the long 95 call was held. A far out-of-the-money short was described as possibly repurchaseable for five or ten cents.

When a stop does not print

A long equity-index futures position was described as able to incur large losses when a decline gaps through a stop-loss. The stop was meant to cap open risk before and during the trade. The order still does not bind a gap that prints through the trigger.

A contractual floor and residual exposure

The hedge example paired a long at 1,300 with a stop at 1,270 and a 1,250 protective put. Residual risk was put premium plus the futures price minus the put strike, still substantial but smaller than the unhedged long.

A higher put strike was described as more protection at higher cost. A 1,250 put quoted at 10 was costed at 500 using a 50 multiplier, and a 1,280 strike was described as possibly about twice that premium.

Time decay and reserved buying power

The long put was described as losing value on a rally or a flat tape because of time decay, the loss of option value as expiration approaches even if the underlying is unchanged. A long call was said to share the risk shape of the futures-plus-put package.

An expensive deep in-the-money substitute quoted at 125 was shown to reserve 6,250 of buying power, which is 125 times the 50 multiplier. Buying power is capital a broker reserves for an expensive option substitute. It can exceed futures margin even when the payoff shape is similar, and the example treated that reserve as more than the futures margin and therefore less leveraged.