Level 2 — Structure: risk fixed by construction, not by collateral

What changes at Level 2: from collateral to construction

At Level 1 the worst case was capped by the cash or shares behind a position: a FTSE 100 10,400 put written and fully cash-secured would hold £104,000.00, the strike times £10 a point. At Level 2 a second option does the capping. Written with the 10,150 put bought beneath it, the same 10,400 put can lose at most £2,070.00 before costs, whatever the index does, and a broker following the US rules ties up that same £2,070.00 of the account's money, against £12,625.00 for the put written on its own.

That change brings three things with it, and the rest of this page takes them in turn. The first is arithmetic: every Level 2 structure has a formula for its most it can lose and make, and it helps to know the formula before the chain. The second is the account: spreads need a margin account and a higher broker permission, and the broker's requirement follows its own rules (spread margin). The third is timing. The formula holds at expiry; before it, and on American contracts that can be assigned early, a spread can briefly be something else. The assignment page shows exactly how (why "defined risk" is only defined at expiry).

The page assumes position Greeks and the ideas on the implied volatility page, since condors, butterflies and calendars are bets on volatility as much as on direction.

The defined-risk formula table

In the formulas, W is the distance between the strikes of one spread, C the net credit taken in, D the net debit paid, and m the money per point or per penny of the contract. Everything is at expiry and before commission.

The m in the formulas is where UK and US examples part company. A spread 5 dollars wide on a US equity option covers 100 shares, so W × m is $500, or £368.76 at an illustrative $1.3559 per £1. On an ICE standard stock option, 1,000 shares quoted in pence, a spread 20p wide is £200.00, and £20.00 on one of the 100-share ICE minis. On the FTSE 100 option (ESX, £10 a point) a spread 250 points wide is £2,500.00, and on the Mini FTSE 100 daily option (£1 a point) £250.00. The contract sizes themselves are on the basics page (UK contract sizes).

Two things the formulas leave out. They are before costs: two legs mean two commissions each way, and four legs four. And on a UK share an assigned short put adds 0.5% stamp tax on the strike, which no width-minus-credit figure contains; on a BP 520 put that is £26.00 (who pays stamp tax). A cash-settled index option such as the FTSE 100 delivers no shares, so neither the stamp tax nor early assignment can arise.

Ten structures on one FTSE 100 chain

Model inputs. Tuesday 1 September 2026, the FTSE 100 at 10,750, a model level (the index closed between about 10,600 and 10,900 in August and September 2026; price data: Yahoo Finance). ICE FTSE 100 options (ESX): £10 a point, European, cash-settled on the exchange delivery settlement price (EDSP) on Friday 16 October 2026, 45 days away; the November calendar leg expires Friday 20 November, 80 days away. Implied volatility from the library's one FTSE surface, IV(K) = 14.0% − 0.40 × ln(K / 10,750), held per strike: 16.30% at 10,150, 15.32% at 10,400, 14.00% at 10,750, 12.72% at 11,100 and 11.83% at 11,350. Bank Rate 3.75%, dividend yield 3.05% (FTSE Russell, 28 August 2026). Fills on the 0.5-point tick at the model value; commission £1.70 a contract (IBKR UK fixed rate, checked 26 September 2026). Model sheet.

Read across, the table is the formula table with numbers in it. The bull put's £2,073.40 is (250 − 43.0) × £10 plus two commissions. The iron condor is the bull put and bear call written together, and its most it can lose, £1,596.80, is one side's loss, not two, because the index cannot settle below 10,150 and above 11,350 at once. The calendar has no single most-it-can-make: at 10,750 on 16 October the model values the November call so that the position shows £1,164.22, and 750 points away either side it shows −‍£633.16 (at 10,000) or −‍£555.51 (at 11,500). The long strangle page fills purchases a tick above model value, so the same strangle there costs £1,610.00 (£1,613.40 with commission) and the straddle in its strike menu £4,205.00.

The thumbnails draw each structure's profit or loss at the October expiry across 9,900 to 11,600, each to its own pound scale (the table gives the pounds); the dashed line marks 10,750 and the dotted lines the strikes.

One FTSE 100 put spread, from entry to settlement

The bull put spread from the table, written as a position of its own: the October 10,400 put written for 91.0 points (model 90.78) and the 10,150 put bought for 48.0 (model 47.84), a credit of 43.0 points, £430.00 on one contract. It is the put side of the iron condor page's condor, and it is European and cash-settled, which is the point of working it here.

Before expiry the spread is worth what the market says, not what the payoff line says. The table marks it to the model at five index levels on the entry day and on Friday 25 September, with 21 days left, against its value at settlement.

Time pays the writer where the index stands still, and the marks near the strikes move towards their settlement values; at 10,400 the spread still shows a loss three weeks before it would settle at the full credit.

Why European cash settlement makes the formula exact

An ESX option can only be exercised at expiry, and both legs settle in cash on one number, the EDSP, set by an intraday auction on the expiry Friday (how the EDSP works). So neither leg can be assigned early, no shares ever arrive, and nothing is left open over the weekend: at an EDSP of 10,000 the writer pays £4,000.00 on the 10,400 put and receives £1,500.00 on the 10,150 put, and the −‍£2,073.40 result is the formula's maximum to the penny. The same shape on BP, an American stock option with physical delivery, can be assigned on its short leg before expiry, and a close between the strikes on expiry day leaves 1,000 shares in the account over the weekend with the long put already gone; the assignment page works a BP 520/480 put spread that loses more than its "maximum" that way (the worked case; one leg assigned). European cash settlement is also what lets US exchange rules treat an index spread differently in a cash account, as the next section shows.

How a broker margins a spread

US exchange and FINRA rules are the most detailed published yardstick for how a broker sets the money held against a spread (Cboe Margin Manual; FINRA Rule 4210(f)(2)). They apply to US broker-dealers. For ICE contracts a UK broker sets its own requirement, and the order preview shows the figure that actually applies; the rules below explain why the figures come out as they do.

• A debit spread is paid for in full, and nothing more is held: "the requirement for debit (or long) spreads is to pay for the net debit in full" (Cboe). The bull call, bear put, long butterfly and calendar above therefore tie up their debits.
• A credit spread is held at the lesser of what the short option alone would need and the spread's maximum potential loss, with the long option paid for and the short option's premium allowed to count towards it (Cboe; FINRA 4210(f)(2)(H)(i)). In practice the account gives up the width less the credit: £2,070.00 for the FTSE bull put and £2,020.00 for the bear call.
• An iron condor or iron butterfly is held at one side's maximum loss, because both sides cannot lose at once. Cboe's own worked iron condor holds the larger side's width, pays for the long options and counts the premiums; on this chain that is £1,590.00 for the condor and £470.00 for the iron butterfly, against £4,090.00 if each side were held separately.
• The short option without its wing would be held under the uncovered-option formula instead (uncovered margin). For the 10,400 put written on its own that is the 91.0-point premium plus the larger of 1,262.5 points (15% of 10,750 less the 350 points the put is out of the money) and 1,040.0 points (10% of the strike), at £10 a point: £13,535.00. The £910.00 premium counts towards that, so the put alone ties up £12,625.00 of the account's money, 6.1 times the spread's £2,070.00; buying the 10,150 put for £480.00 cuts it by £10,555.00.

Cash account or margin account. Under the Cboe rules, the only spreads that may be carried in a US cash account are those "composed of European style exercise, cash-settled index options, all of which expire at the same time", with cash equal to the maximum potential loss deposited. At Interactive Brokers the cash account's published rules cover options bought outright, covered calls and cash-backed puts, and spreads and other strategy-based combinations that include a written option come under the margin account's requirements (IBKR UK account-type table, checked 28 September 2026); whether a combination of two bought options (a long straddle or strangle) is accepted in a cash account could not be confirmed (checked 27 September 2026). IBKR places debit spreads at its options Level 2 and credit spreads, short iron condors and butterflies at Level 3 (the permission ladder). Other brokers' rules differ; the broker comparison sets them out.

What an early assignment does to the requirement. A European FTSE spread cannot be assigned early. On an American stock option the short leg can be, and then the account holds shares plus a long option overnight, which a margin account prices as a share position: if the short leg of a BP 520/480 put spread is assigned, £5,227.40 falls due for 1,000 shares at 520p with the stamp tax and commission, against a spread whose requirement was the 40p width less its credit, until the long put is used or sold (one leg of a spread assigned).

A spread on a UK tax return: two computations, sometimes two years

Each leg of a spread is a separate asset. The library's counting rule gives each leg one computation, dated by how that leg ends; a closed vertical is two computations and a closed iron condor four. Applied to the FTSE put spread, all in 2026/27:

Closing the spread early by trading is also two computations: the written put's buy-back becomes a cost of its grant, dated on the day it was written (s148), and the bought put's sale is a disposal on the sale date. The two legs are different series, so they are never matched with each other; the tax page explains matching within one series.

Across 5 April: the same spread written in March

Model inputs. The same model inputs re-dated: Monday 22 March 2027, the index assumed at 10,750, 60 days to Friday 21 May 2027; the 10,400 put written at 119.0 (model 119.15) and the 10,150 put bought at 70.5 (model 70.62), a credit of 48.5 points. On Monday 10 May 2027, 11 days before expiry, the index is assumed to have fallen to 10,100 (a path chosen for the lesson, not a forecast), and the spread is closed: the 10,400 put bought back at 316.5 (model 316.51) and the 10,150 put sold at 139.5 (model 139.66).

• The written 10,400 put: 119.0 points received, 316.5 paid to buy it back, two commissions: −‍£1,978.40. Under s148 the buy-back is a cost of the March grant, so this loss belongs to 2026/27, although it was fixed in May.
• The bought 10,150 put: sold for 139.5 points after costing 70.5, less two commissions: a gain of £686.60, dated 10 May, in 2027/28.
• Net: −‍£1,291.80, split across two tax years. The loss arrives in the earlier year, where it can reduce 2026/27 gains, and the gain lands a year later. The 2026/27 online return is not due until 31 January 2028, so in the ordinary case the May buy-back is simply included when that return is prepared; only a return filed before May would need amending.

The split can run the other way. Had both puts lapsed in May, the written put's gain would sit in 2026/27 and the bought put's loss in 2027/28, where it cannot be carried back: relief deferred, not lost, as the tax page's HSBC spread shows (Example 13). A roll across 5 April adds a third date; the rolling page works one (UK tax of a roll).

The Wheel, counted. A Wheel turn in which the put is assigned and the covered call is later assigned is one share computation, not a string of taxable events: the put premium comes off the cost of the shares and the call premium is added to their sale proceeds (s144(2)). Each put or call along the way that lapses or is bought back adds one computation of its own (the tax page's full Wheel turn). No ISA can hold any of this (wrappers).

The course's conventions, and the case against each

The strategy pages manage their examples with a few conventions taken from US retail options education. Their origin, and the absence of independent evidence that any of them adds value, are set out on the methods page. Here is what each does to this page's spread, and the argument against it.

The fourteen structures, and what each adds

Nothing at Level 2 writes an option without a bought option, shares or the full cash behind it. The structures that do, and the margin and stress arithmetic that comes with them, are Level 3.

Pages that apply Level 2

Each works one idea from this page in full, with its own numbers:

Self-check: ten questions before Level 3

Not scored, and not a requirement. The working uses only this page's numbers.

How these numbers are calculated