Tag Archives | option nomenclature options nomenclature credit spreads bull spread bear spread debit spread iron condors

Options terminology. Why is it so redundant?

I find it annoying that the options industry does not use standardized nomenclature.

A vertical spread is defined as a
position consisting of two call (or two put) options; one bought, and the other
sold. Both options expire at the same time. 

By definition: Buying a spread means that the more expensive option is bought.  It's also ok to say that buying the spread means the option with the higher [higher absolute value] delta is bought.

Definitions are available everywhere on the Internet.  I found this one, which appears to be quite satisfactory:

"A bear spread is an option strategy where a call is purchased
and a call of a lower strike price on the same stock is sold. Both
calls must have the same expiration date.

A bear spread can also be
established by using put options, in which one put is purchased and
another put with a lower strike price is sold. Again, both strikes must
have the same expiration date.

These option strategies are called "bear
spreads" because they are used by traders who are bearish on a stock." 

This definition is complete.  Everyone who reads it should come away understanding what the term 'bear spread' means. 

My question is why bother to call it a bear spread?


From my perspective, a problem can result by using extraneous adjectives which don't help the reader gain a better understanding.  Consider this example, from Wikipedia:

"Bull call spreads and bull put spreads are bullish vertical spreads constructed using calls and puts respectively."

I would prefer:

"Buying a call spread and selling a put spread are bullish vertical spreads"


Assumption: A definition should be complete, easily understood, and unambiguous.  It should not contain extraneous information.

A simple spread


Buy 20 AAPL Nov 240 calls

Sell 20 AAPL Nov 250 calls

Cost: $0.50 per spread

What's an appropriate description for this spread?

It's an AAPL spread

It's a call spread

It's bullish

It's opened by paying a debit

The options are out of the money

The options expire in November

The premium is fifty cents

If you told anyone that you bought a November out-of-the-money bullish call spread on AAPL at a fifty-cent debit – that person would clearly understand what you were telling him.  But is that good terminology?  Are all the terms necessary?  Is it redundant?  Does anyone (besides me) care?

Here is what I believe:

The best description of this trade is: "I bought the AAPL Nov 240/250 call spread at fifty cents."

A sensible nomenclature system would include redundant characteristics in the basic definition, eliminating any reason for using unnecessary words.

1) When you buy a spread, you pay a debit.*  When you sell a spread you collect a credit.  No need to mention the word debit or credit.

*An iron condor is not a vertical spread.

2) When you buy the more costly option, and sell the less expensive option, you buy the spread.

    When you buy a call spread, it is a bullish play;

    When you sell a call spread, it is bearish;

    When you buy a put spread, it is bearish;

    When you sell a put spread, it is bullish.

Thus, it's never necessary to use the term 'bull' or 'bear' to describe a spread. 

All that's needed is: buy or sell;  calls or puts.

3) If it's necessary to the discussion, additional descriptive words can be used – but basic definitions can ignore those words.

Stock (index) name


Strike price

Spread premium (cost)

When writing about the example trade above, "I bought the AAPL Nov 240/250 call spread @ $0.50."  None of these words is extraneous.  The description is complete.

If I write that "I bought the RUT Mar 660/670C spread" you know exactly what was traded (but not the prices of the options).  I believe it's wrong to call it a bull call spread.  I believe it's incorrect to refer to it as buying the debit spread.

When the specifics are not mentioned, it is proper terminology to say:

  • I traded a credit spread (could be calls or puts)
  • I sold a put spread
  • I bought a call spread
  • I bought an AAPL put spread for a debit of $1.20 (the debit is specified)
  • Let's discuss put credit spreads; or let's discuss selling put spreads

It's incorrect to say:

  • I sold a call credit spread (If you sell, it IS a credit spread)
  • I bought an AAPL put spread for a debit (amount not specified, thus 'debit' is unnecessary)
  • I sold a bullish put spread on AAPL ('sold AAPL put spread,' is sufficient)
  • Let's discuss selling put credit spreads

When we look at that AAPL spread for example, it's acceptable (as things stand today) to state that you bought the bull call spread.  But it's equally as accurate to state that you sold the bear call spread.  Either gives you the same position.  Why allow any possible confusion?  It's similar to using a double negative.

The trade is: buy the APPL call spread.  There is no reason to call it a bull spread or refer to it as a call debit spread.


Read full story ยท Comments are closed