A vertical spread means buying one option and selling another of the same type and expiry, at a different strike. It caps both your potential profit and your potential loss. For many traders it is a more controlled way to trade options than buying or selling a single contract.
Debit spreads: a bull call spread
A stock trades at $100. You buy the $100 call for $4 and sell the $110 call for $1.50. Your net cost (debit) is $2.50, or $250 per spread.
| Item | Formula | Example |
|---|---|---|
| Maximum loss | Net debit | $250 |
| Maximum profit | Strike width − debit | ($10 − $2.50) × 100 = $750 |
| Break-even | Lower strike + debit | $102.50 |
Compared with buying the $100 call alone for $400, you pay less and need a smaller move to break even, but you give up gains above $110.
Credit spreads: a bull put spread
You sell the $95 put for $2 and buy the $90 put for $0.80. You receive a credit of $1.20 ($120). If the stock stays above $95 at expiry, both puts expire worthless and you keep $120. Your maximum loss is the width minus the credit: ($5 − $1.20) × 100 = $380.
The four basic verticals
| Spread | View | Pay or receive |
|---|---|---|
| Bull call spread | Up | Pay (debit) |
| Bear put spread | Down | Pay (debit) |
| Bull put spread | Up or sideways | Receive (credit) |
| Bear call spread | Down or sideways | Receive (credit) |
Why traders use spreads Defined risk
Pros
- Maximum loss is known up front
- Lower cost, less hurt by IV crush
Cons
- Profit is capped
- Two bid-ask spreads to pay
Conclusion
Vertical spreads let you choose your risk before you enter. Always enter them as a single order with a limit price, and size them using our risk management rules.
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