Contingent cash flow

This one is not written up yet

The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.

Written up from the same chapter

• Diagonal spreadTwo options of the same type on the same underlying with both a different strike and a different expiry — the most complicated of the three spread families, and the only one that varies on both axes.
• Horizontal spreadTwo options of the same type and the same strike but different expiries — a position whose entire value is the difference between the two legs' time values, not a view on direction.
• Long straddleBuying a call and a put at the same strike and the same expiry — a bet that the underlying moves a long way in either direction, with two break-even points and a maximum loss equal to both premiums.
• Long strangleBuying an out-of-the-money call and an out-of-the-money put with the same expiry but different strikes — the cheaper cousin of the straddle, with a wider band of loss between two break-even points.
• Vertical spreadTwo options of the same type and the same expiry but different strikes, one bought and one sold — a limited-profit, limited-loss position that trades away part of the upside to cut the cost or cap the risk.