What Is a Vertical Spread?
A vertical spread is an options strategy where you buy one option and sell another at a different strike price—both with the same expiration. This creates defined risk and defined reward.
You can structure spreads to be bullish (bull call spread, bull put spread) or bearish (bear call spread, bear put spread). The beauty: your max loss is known upfront. No surprises. No blow-ups.
Bull Call Spread Example
Thesis: Stock at $100, expect move to $110
Structure:
- Buy $100 call for $5
- Sell $110 call for $2
- Net debit: $3 ($300 per spread)
Max profit: $10 (spread width) - $3 (cost) = $7 ($700)
Max loss: $3 ($300)
Breakeven: $103
Risk:Reward = 1:2.3. Defined on entry.
Why Vertical Spreads Work
- Defined risk: You can't lose more than the debit paid (or credit received minus spread width).
- Lower cost: Selling one option reduces the cost of buying the other.
- Favorable probabilities: You don't need huge moves—just directional bias.
- Theta friendly: Credit spreads benefit from time decay.
The Four Types of Vertical Spreads
1. Bull Call Spread (Bullish, Debit)
Buy lower strike call, sell higher strike call
Use when: Moderately bullish, want defined risk
Max profit: At or above higher strike
Max loss: Debit paid
2. Bull Put Spread (Bullish, Credit)
Sell higher strike put, buy lower strike put
Use when: Moderately bullish, want to collect premium
Max profit: Credit received (if stock stays above sold strike)
Max loss: Spread width - credit
3. Bear Call Spread (Bearish, Credit)
Sell lower strike call, buy higher strike call
Use when: Moderately bearish, want to collect premium
Max profit: Credit received (if stock stays below sold strike)
Max loss: Spread width - credit
4. Bear Put Spread (Bearish, Debit)
Buy higher strike put, sell lower strike put
Use when: Moderately bearish, want defined risk
Max profit: At or below lower strike
Max loss: Debit paid
When to Use Each Spread
- Credit spreads: High probability, collect theta decay, lower max profit
- Debit spreads: Lower probability, pay upfront, higher max profit potential
- Tight spreads ($5 wide): Lower risk, lower reward, higher probability
- Wide spreads ($10-20 wide): Higher risk, higher reward, need bigger move
Real Example: Bull Put Spread on SPY
Trade Setup
Date: SPY at $450, bullish bias
45 days to expiration
Structure:
- Sell $440 put (collect $2.50)
- Buy $435 put (pay $1.00)
- Net credit: $1.50 ($150 per spread)
Max profit: $150 (if SPY > $440 at expiration)
Max loss: $5.00 (spread width) - $1.50 (credit) = $3.50 ($350)
Breakeven: $438.50
Outcome: SPY closes at $455. Both options expire worthless. Keep $150 (43% return on risk in 45 days).
Final Thoughts: Precision Over Power
Vertical spreads aren't about hitting home runs. They're about consistent, defined-risk profits. You know your max loss before you enter. You know your max gain. No surprises.
For traders who value capital preservation and high-probability trades, vertical spreads are the ultimate tool.
Because in options trading, survival is success—and vertical spreads keep you alive.