# Capping the downside with call spreads, put spreads and condors 

Amin Kartoev · 22 October 2026

You want exposure to a price move, but a plain option costs too much. What do you give up to pay less?


## Introduction

I started looking at spreads because I wanted exposure to an energy price rising without paying full price for a call option. A long call already has a limited loss, since the most you can lose is what you paid for it. My problem was that what I would pay was large, and a large premium is a large maximum loss.

A spread is the fix. You buy one option and sell another alongside it. The one you sell pays for part of the one you buy, so you pay less and risk less. The price of that is that your profit is capped too.

This post explains how that works in plain terms, then builds up from the simplest spread to the condor. It follows on from [Pricing one call option two ways](/blog/quant-foundations-2627/pricing-one-call-option-two-ways), and the [derivatives glossary](/blog/glossary-index/glossary-derivs) has the full list of definitions.

## The words you need

- **Call option:** the right to buy something at a fixed price on a set date.
- **Put option:** the right to sell something at a fixed price on a set date.
- **Strike:** that fixed price.
- **Premium:** what you pay to buy the option.
- **Payoff:** what the option is worth at expiry. A call pays the amount the price finishes above the strike, or nothing.
- **Long:** you bought it. **Short:** you sold it, so you are the one who has to pay out.
- **Spread:** two or more options on the same thing, held together, usually one long and one short.

Throughout, I use one example: a stock at **100**, with options expiring in one year.

## The call spread

Say you think the stock will rise. The plain version is to buy a call with a strike of 100. It costs about **9.93**.

The spread version adds a second step. You also sell a call with a strike of 110, and you collect about **5.66** for it. Your net cost is the difference, about **4.27**.

What you now hold is:

- If the stock finishes **below 100**, both options are worthless and you lose the 4.27 you paid.
- If it finishes **between 100 and 110**, you earn the amount above 100.
- If it finishes **above 110**, you stop gaining. The call you sold costs you every extra pound above 110, which cancels out the extra gain on the call you bought.

That gives a clear set of limits:

- **Most you can lose:** 4.27, the amount you paid
- **Most you can make:** 5.73 (the gap of 10, minus the 4.27 cost)
- **Breakeven:** 104.27

Compare this with the plain call, which costs 9.93. The spread costs less than half as much, and the plain call has no limit on profit. That limit is the price of the saving.

### Why the spread is not a bargain

It is tempting to see the spread as the same trade, but cheaper. It is not the same trade. The part you sold is the profit you would have made if the stock went above 110, and that part has real value, which is why selling it paid for most of your purchase.

In a fair market, you are not getting a discount. You are choosing a different shape of bet: a bounded one instead of an open-ended one. If you believe the stock will end between 100 and 110, the spread suits that view. If you simply wanted to spend less, you may have given up the upside you actually wanted.

One way to see this: a very narrow call spread is a bet on one yes or no question, whether the stock finishes above a certain price. That is the same probability from the pricing post, and a wide spread is that bet spread out across a range.

## The put spread

A put spread is the same idea for a falling price. You buy a put with a strike of 100 and sell a put with a strike of 90. You profit if the stock falls, your gains stop once it reaches 90, and your loss is limited to what you paid.

A fixed relationship called put-call parity links puts and calls. In plain terms, it means a put spread and a call spread are two versions of the same bet. A put spread on the way down behaves like a call spread held the other way round, plus a fixed amount of cash. Traders pick one over the other for practical reasons, such as which has more buyers and sellers, not because the bet is different.

## The butterfly and the condor

So far, the spread bets that the stock moves in one direction. The next two bet that it does not move much.

**Butterfly.** You buy one call at a low strike, sell two calls at a middle strike, and buy one call at a high strike. The payoff looks like a tent: you earn the most if the stock finishes exactly at the middle strike, and you lose a small amount if it finishes far away in either direction.

**Condor.** The same thing with a flat top, built with four options at four strikes. For example, with strikes at 90, 95, 105 and 110, you collect the full payoff of 5 if the stock finishes anywhere between 95 and 105. It pays less as the stock drifts towards 90 or 110, and nothing outside that. It costs about 1.40, which is also the most you can lose.

The condor is cheap because it only pays out for a fairly narrow range, and landing in a narrow range is unlikely. You are being paid a small amount, with limited risk, to bet on the market staying quiet.

## All of them in one table

| Structure | You want the stock to... | Most you can lose | Most you can make |
|---|---|---|---|
| Call spread | Rise | What you paid | Capped |
| Put spread | Fall | What you paid | Capped |
| Butterfly | Stay near the middle | What you paid | Capped, at the middle |
| Condor | Stay in a range | What you paid | Capped, across the range |

In every case the loss and the profit are both limited. That is the whole point of a spread.

## How they behave before expiry

The payoff tells you what happens on the final day. Before then, three things matter, and they are the main reason people use spreads:

- **Sensitivity to the stock price (delta).** A call spread moves much less than a plain call when the stock moves. In my example it moves about a third as much.
- **Sensitivity to volatility (vega).** A plain call gains if volatility rises, because bigger swings make the option more valuable. A call spread cancels most of that out, because the option you sold loses value in the same situation. If your view is about direction and not about volatility, that is useful.
- **Sensitivity to time (theta).** A plain call loses value every day. Butterflies and condors work the other way: they tend to gain as time passes if the stock stays put, and they lose if volatility jumps.

## Where it breaks

All the numbers here assume one flat volatility, as in the pricing post. Real markets do not work that way.

- **Different options have different prices of risk.** Options at different strikes trade at different implied volatilities. A spread's price depends on the gap between those two, so the spread is also a quiet bet on how the market is pricing risk at each strike.
- **Every extra option costs money to trade.** A condor has four, and each one has its own gap between the price you buy at and the price you sell at. That can eat much of the edge before you start.
- **Early exercise.** The examples are for options exercised only at expiry. If the option can be exercised earlier, the one you sold can be used against you ahead of time.
- **Capped profit is a real cost.** You only find out how expensive it is when the stock runs well past your upper strike.

## What to try next

1. Change the strikes of the call spread to 100 and 105, then to 100 and 120. How do the cost, the maximum profit and the breakeven change?
2. Draw the payoff of a butterfly on paper by drawing two call spreads, one the right way round and one reversed, and adding them together.
3. Work out why a call spread can never cost more than the gap between its strikes, and why it must cost less than the plain call.

Part of [Quant Foundations](/blog/quant-foundations-2627) · Previous: [Finding Alpha in Random Noise](/blog/quant-foundations-2627/finding-alpha-in-random-noise)