Level 2 — Structure: risk fixed by construction, not by collateral
In Level 1 your worst case was bounded by the cash or shares sitting behind the trade. Here it is bounded by the shape of the position itself — the width of a spread, less the credit you took. That single change is what the whole tier is about, and it is why it needs a different account.
14 structuresVerticals through to the Wheel
Margin accountA cash account cannot hold most verticals
You have traded all five Level 1 structures with real money and been through at least one assignment. You now want to control cost, probability and time rather than simply own or cover a position — which means building trades whose maximum loss is set by the distance between two strikes rather than by the cash you have pledged.
This is where most UK readers spend most of their time, and it is also where the section's standard rulebook applies: an entry gate expressed in numbers, a profit target, a stop, and a time stop. If a trade cannot be described in those four terms before it is opened, it does not belong in this tier.
Prerequisites before your first spread
Requirement
What it means in practice
Evidence of Level 1
One completed assignment, one option allowed to lapse, and one full expiry cycle survived — self-certified against the Level 1 gate.
A margin account with spread permission
A cash account cannot hold most verticals. This, not strategy knowledge, is the reason a UK reader's first spread order is usually rejected.
An IV rank or IV percentile source
Every entry rule in this tier is stated in IV terms. Without a working volatility read and the ability to see a term structure, the rules are unenforceable and you are guessing.
Capital of roughly £10,000–£25,000
Enough to run 5–10 concurrent defined-risk positions each risking no more than 2% of capital, so that no single position dominates the book.
Whole-cycle capital for the systems
For the Wheel, the capital to take delivery — 1,000 shares on a traditional ICE UK series, 100 in the US. For a poor man's covered call, the capital to fund a 0.80-delta LEAP, typically 20–35% of the share price times the multiplier.
A written trading plan
Entry criteria, profit target, stop and time stop, written down before the first spread rather than reconstructed after the first loss.
Tax admin capacity
Events multiply. One Wheel turn can produce a grant-date gain on the put, an assignment, a 0.5% SDRT charge on UK shares, a grant-date gain on the call and a share disposal — five taxable events per cycle.
The tax point that catches spread traders
Premium on an option you write is a chargeable gain in the tax year the option is granted, not when the spread is closed (TCGA 1992 s.144(1); HMRC CG55536). A credit spread opened in March is taxed on its short leg for that tax year even if the position is still open on 5 April and later closes at a loss. Options of the same series pool into a s.104 holding. The wrapper position does not improve here either: GIA only, because HMRC excludes "futures or share options" from ISA qualifying investments, and SIPP access is rare and provider-specific. Where you trade US underlyings, each disposal converts to sterling at that date's rate — and the FX conversion cost, measured as a percentage of the credit, is what quietly kills small US spreads.
The fourteen structures
Grouped by what they teach. Each links to its section in the strategy library; dedicated pages follow in later phases.
Opens the tier
The Wheel
Both legs are Level 1, which is why it is so often mislabelled a beginner strategy. The difficulty is the repeated capital lock-up, the cost-basis and tax administration across cycles, and the temptation to wheel a falling knife. Your first system, not your first trade.
The same directional view expressed as a debit or a credit, chosen on IV rank rather than preference. Maximum loss is width minus credit, known before entry.
Buying a move rather than a direction — and the clearest lesson in the tier, because a correct directional call can still lose money to an implied volatility collapse after the event.
Positions built across expiries rather than across strikes. LEAPS sit here rather than in Level 1 because their risk is time-structure risk, and because they are the required long leg for both the diagonal and the poor man's covered call.
Range and pin views inside hard loss limits. The wings are exactly what make these teachable — remove them and you have a Level 3 obligation, not a Level 2 position.
Risk defined by construction (width minus credit) versus risk defined by collateral — the organising idea of the tier.
Credit versus debit framing of the same view, chosen on IV rank rather than on taste.
Probability of profit against payoff ratio, and why a 90%-probability trade is not automatically a good one.
IV rank and IV percentile as a numeric entry gate with stated bands; expected move as the basis for strike placement.
Delta as a strike-selection tool (the 16-delta and 30-delta conventions) and net position delta as a book-level exposure measure.
Theta as a portfolio-level income rate; vega as the risk you are actually being paid to carry.
Term structure: why calendars and diagonals are long vega while condors are short it, and how much extrinsic value sits inside a 0.80-delta LEAP.
Rolling defined properly — two trades, not an adjustment — with the hard rule that a credit position is never rolled for a net debit.
Early assignment on the short leg of a spread, and what it does to your margin overnight before you can act.
Pin risk and expiry-week management, and mechanical profit-taking instead of holding to expiry.
The UK layer: a grant-date chargeable gain on every short leg, s.104 pooling of same-series options, GIA-only wrappers, and FX cost measured as a percentage of the credit.
What you can do at the end of it
Choose between a debit and a credit structure for the same view and justify it in one sentence about IV rank.
Build and price a vertical, an iron condor, a calendar, a diagonal and a PMCC from a live chain, stating maximum loss, maximum profit, breakeven and buying-power reduction in pounds before entry.
Gate every entry on a written IV, DTE and delta rule — and decline the trades that fail it.
Take a mechanical profit target instead of holding to expiry, and explain why holding to expiry is a gamma decision.
Roll a tested short strike correctly, and identify the cases where the right action is to close rather than roll.
Run a Wheel cycle end to end on a UK-listed underlying and reconcile every CGT and SDRT consequence of each turn.
Hold 5–10 simultaneous positions and state the book's net delta, net vega and percentage of buying power in use.
Explain why you are still not permitted to sell an uncovered option.
You are ready for Level 3 when…
Level 3 removes the wings. Loss stops being a number set by construction and becomes a number set by the market and your broker's margin call, so the gate is a track record and a balance sheet rather than a reading list.
Twelve months or more and at least 100 closed Level 2 trades, with a written record of each.
At least one losing month taken by the rules rather than by improvisation.
You can state your book's net delta, net vega and buying-power usage without opening a spreadsheet.
You have a tested plan for being assigned on one leg of a multi-leg position overnight.
You can compute what your positions require in margin after a two-standard-deviation adverse move, not just at entry.
All five true?Level 3 — Exposure opens with the reason most readers should stop here instead. That is not a rhetorical flourish: the portfolio-margin threshold alone excludes most UK retail accounts.
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