A vertical spread is one of the most common options strategies. It involves buying and selling options at different strike prices but the same expiration. Here is how vertical spreads work.
What is a Vertical Spread?
A vertical spread uses two options of the same type (both calls or both puts) with the same expiration but different strikes. The strikes are "stacked vertically" on an options chain, hence the name.
Simple version: You buy one option and sell another at a different strike. This reduces your cost and limits your risk, but also caps your profit.
Types of Vertical Spreads
Bull Call Spread (Debit)
Bullish strategy using calls.
- Buy a lower strike call
- Sell a higher strike call
- You pay a net debit
- Profit if stock goes up
Bull Call Spread Example
Stock at $100, you are bullish.
- Buy $100 call for $4.00
- Sell $105 call for $2.00
- Net debit: $2.00
Max profit: $3.00 (width minus debit) if stock above $105
Max loss: $2.00 if stock below $100
Bear Put Spread (Debit)
Bearish strategy using puts.
- Buy a higher strike put
- Sell a lower strike put
- You pay a net debit
- Profit if stock goes down
Bull Put Spread (Credit)
Bullish strategy using puts.
- Sell a higher strike put
- Buy a lower strike put
- You receive a net credit
- Profit if stock stays above the short strike
Bull Put Spread Example
Stock at $100, you are bullish.
- Sell $95 put for $2.00
- Buy $90 put for $0.75
- Net credit: $1.25
Max profit: $1.25 if stock above $95
Max loss: $3.75 (width minus credit) if stock below $90
Bear Call Spread (Credit)
Bearish strategy using calls.
- Sell a lower strike call
- Buy a higher strike call
- You receive a net credit
- Profit if stock stays below the short strike
Debit vs Credit Spreads
- Debit spreads: You pay to enter. Need stock to move in your direction. Time works against you.
- Credit spreads: You receive money to enter. Can profit from no movement. Time works for you.
Choosing Strike Width
The width between strikes affects risk and reward:
- Narrow width ($1-2): Lower risk, lower reward, higher probability
- Wide width ($5-10): Higher risk, higher reward, lower probability
Why Use Vertical Spreads?
- Defined risk: You know max loss upfront
- Lower cost: Cheaper than buying options outright
- Less IV exposure: The sold option offsets IV changes
- Lower margin: Credit spreads require less margin than naked options
Track Your Spread Trades
Pro Trader Dashboard tracks all your vertical spreads and shows your performance over time.
Summary
Vertical spreads are versatile strategies that combine buying and selling options at different strikes. Use debit spreads when you expect movement, credit spreads when you expect the stock to stay in a range. Both have defined risk and can be tailored to your market outlook.
Learn more: credit spreads and debit spreads.