Clearing V1
Spreads
A spread pairs a long option with a short option into one defined-risk position. Unlike a perp-backed short, a spread is never backed by a perp: its loss is bounded by the gap between its two strikes, so it is fully cash-secured, the most it can lose is locked as collateral up front. There is no cover to liquidate and no resolution to run.
Cash-secured, never perp-backed
A perp-backed short is backed by a self-liquidating cover. A spread is not, and cannot be. Because a spread’s loss is capped at the distance between its two strikes, it is fully secured by locking that amount in collateral: no perp, no liquidation, no force-close, and no recollateralization auction. The position is backed in full from the moment it opens, by cash rather than by a hedge, which is what makes it defined-risk in the strict sense.
Credit and debit
Which side pays up front depends on the spread:
- A credit spread takes in net premium and locks the width as collateral. The width is the most it can lose, so locking it secures the position. This is the only kind of spread that locks anything.
- A debit spread pays net premium up front. That premium is already the most it can lose, so there is nothing further to lock: it is prepaid.
The width is the max loss
The width is the strike gap times the size, the difference between the long and short strikes, across the number of contracts. That is the largest amount a spread can be down at expiry, whichever way the underlying moves, so a credit spread that locks the width is collateralized for its worst case exactly. Nothing beyond the width is ever at risk, which is what lets a spread be fully secured cheaply: you post the max loss, not the full notional.
The two legs
The legs have to fit together. They are options on the same asset, in the same collateral token, with the same contract size, and the long leg must live at least as long as the short, so it covers the short for the short’s entire life. Opening a spread combines the two legs and locks the width; closing it unlocks the width and hands the legs back, the exact reverse.
Settlement
At expiry or exercise the two legs net against each other, and the outcome always lands within the width. For a credit spread the locked collateral covers whatever is owed and the remainder returns to the writer; for a debit spread the prepaid premium already bounded the loss, and any intrinsic is collected on the long leg (where the exercise feeapplies). Because there is no perp behind a spread, none of the force-close machinery touches it, settlement is just the legs netting against the collateral locked at the start.