Building a complete options trading case

Testing and Trade Management · Options Trading Guide

Turn the guide into a complete research worksheet. A finished case connects a thesis with contract terms, costs, scenario payoffs and an exit procedure.

Define a fictional research question

Assume fictional company ALTO trades at $100. A researcher has a moderately bullish view over the next six weeks but wants to limit the option premium committed. This is a teaching case with invented prices. The worksheet records the evidence for the view, the next earnings date, liquidity requirements and what would invalidate the idea before selecting a strategy.

Construct and size the position

Consider buying a 100 call for $6 and selling a 110 call with the same expiration for $2.50. The debit is $3.50 per share, or $350 for one standard spread. With a $10 allowance for total transaction costs, planned maximum loss is $360 under the completed spread assumptions. A selected $500 cash budget permits one spread. The ten point width caps gross expiration profit at $650 before costs.

Write the scenario table in words

At expiration with ALTO at $95, both calls have zero intrinsic value and gross loss is $350. At $105, the spread is worth $500 and gross profit is $150. At $115, the spread value is capped at $1,000 and gross profit is $650. Gross expiration breakeven is $103.50. Subtracting the assumed $10 costs gives a cost adjusted breakeven of $103.60 within the uncapped region. Before expiration, volatility and time can change these marks.

Finish the operating plan

Confirm the actual multiplier, deliverable and exercise style. For physical settlement, plan how the spread will be closed before expiration or how delivery obligations will be funded and managed. Set a review date, a thesis invalidation rule and an order price limit. Compare the spread with shares, a single call and no trade. After the simulation, reconcile fills and costs, review deviations and preserve the original worksheet. Completing the guide develops a decision process, not a guarantee of profitable trading or professional competence.

Try it yourself

Using the same spread, ALTO finishes at $108. What are gross profit and net profit with the assumed $10 costs?

Show the worked answer

The spread is worth $800. After the $350 debit, gross profit is $450. Subtracting $10 leaves $440. This expiration example assumes the intended spread payoff is fully realised without later residual stock exposure.