What is a vertical spread?
In one line: A vertical spread is buying one option and selling another of the same type and expiry, but a different strike. Both the gain and the loss are capped.
Example 1: a debit spread
A stock trades at $100. You think it may rise.
- Buy the $100 call for $4.00.
- Sell the $105 call for $1.50.
Net cost: $4.00 − $1.50 = $2.50, or $250 per spread (100 shares). This is called a bull call spread.
| Stock at expiry | Result |
|---|---|
| $100 or below | Both expire. −$250 (max loss) |
| $102.50 | Break-even. $0 |
| $105 or above | Worth $5. $500 − $250 = +$250 (max gain) |
Example 2: a credit spread
Same stock at $100.
- Sell the $95 put for $2.00.
- Buy the $90 put for $0.80.
You collect a premium of $1.20, or $120. This is a bull put spread.
- Max gain: $120, if the stock stays above $95.
- Max loss: strike width minus credit: ($5 − $1.20) × 100 = $380, if the stock ends at $90 or below.
Notice the shape. You collect $120, but can lose $380. A math example, not a promise. Commissions left out. Model both in the options profit calculator.
Why it matters
A vertical spread puts a hard limit on loss. You know the worst case before you enter, which makes Position size easy to work out.
The bought option also cuts the cost of the trade, or protects the sold one. The price is a capped upside.
A common mistake
Looking only at the credit. A credit spread often wins small and loses bigger. Many small wins can be wiped out by one max loss. Judge it on the max loss, not the premium.
Spreads can be assigned early on the sold leg, especially near expiry or an ex-dividend date. See Assignment.
Start with options trading basics if calls and puts are new.
Questions
Why is it called a vertical spread?
On an options chain, strikes are listed top to bottom. The two legs sit at different heights in the same column, so it's "vertical."
What is the max loss on a vertical spread?
For a debit spread, what you paid. For a credit spread, the gap between the strikes minus the credit, times 100.
Do I need special approval to trade spreads?
Usually, yes. Brokers set options approval levels, and spreads often need a higher level than buying calls or puts.
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