🎯 In 30 seconds: A vertical spread is two options of the same type (both calls or both puts) with the same expiration and different strikes. You buy one and sell the other. That caps both your profit and your loss, and you know both numbers before you trade. There are four kinds: bull call and bear put spreads cost money up front (debit), bull put and bear call spreads pay you up front (credit). The math for all four fits in one table.
Why spreads exist
Buying a single call is simple, but you pay for all of its time value, and if the stock does not move fast enough, it decays to nothing (see What an option is worth). Selling a single option collects time value, but the loss can be huge.
A spread is a middle path. The option you sell pays for part of the option you buy. In exchange, you give up profit beyond the second strike. The result is a trade with a ceiling and a floor.
The name "vertical" matches how an options chain lists strikes, top to bottom: the two strikes sit one above the other in the same expiration. The width of the spread is the difference between the strikes.
The option prices used in this chapter
One hypothetical stock at $100, one hypothetical chain of options expiring in 30 days. The prices are internally consistent (they respect put-call parity), but they are not real quotes. Real trades fill somewhere between the bid and the ask.
| Strike | Call | Put |
|---|---|---|
| $90 | $11.10 | $0.80 |
| $95 | $7.10 | $1.80 |
| $100 | $4.00 | $3.70 |
| $105 | $1.80 | $6.45 |
| $110 | $0.70 | $10.35 |
1. Bull call spread (debit): you think the stock goes up
Buy the $100 call for $4.00 and sell the $105 call for $1.80. You pay a net debit of $2.20, or $220 per spread.
- Max loss = debit = $220, if the stock is at or below $100 at expiration. Both calls expire worthless.
- Max profit = (width - debit) x 100 = ($5 - $2.20) x 100 = $280, at or above $105.
- Breakeven = lower strike + debit = $102.20.
Compare with buying the $100 call alone for $400. The single call needs the stock above $104 to break even, and its max loss is $400. The spread breaks even at $102.20 and risks $220. The catch: at $115, the call alone makes $1,100 and the spread still makes $280.
2. Bear put spread (debit): you think the stock goes down
Buy the $100 put for $3.70 and sell the $95 put for $1.80. Net debit $1.90, or $190.
- Max loss = debit = $190, at or above $100.
- Max profit = (width - debit) x 100 = ($5 - $1.90) x 100 = $310, at or below $95.
- Breakeven = higher strike - debit = $98.10.
3. Bull put spread (credit): you think the stock stays up
Sell the $95 put for $1.80 and buy the $90 put for $0.80. You receive a net credit of $1.00, or $100.
- Max profit = credit = $100, at or above $95. Both puts expire worthless.
- Max loss = (width - credit) x 100 = ($5 - $1.00) x 100 = $400, at or below $90.
- Breakeven = short strike - credit = $94.
This is a cash-secured put with a cheap put underneath it. The $90 put caps the disaster. Instead of risking almost $9,500 on a $95 put, you risk $400.
4. Bear call spread (credit): you think the stock stays down
Sell the $105 call for $1.80 and buy the $110 call for $0.70. Net credit $1.10, or $110.
- Max profit = credit = $110, at or below $105.
- Max loss = (width - credit) x 100 = ($5 - $1.10) x 100 = $390, at or above $110.
- Breakeven = short strike + credit = $106.10.
All four on one card
| Spread | View | Pay or get paid | Max profit | Max loss | Breakeven |
|---|---|---|---|---|---|
| Bull call | Up | Debit | Width - debit | Debit | Lower strike + debit |
| Bear put | Down | Debit | Width - debit | Debit | Higher strike - debit |
| Bull put | Not down | Credit | Credit | Width - credit | Short strike - credit |
| Bear call | Not up | Credit | Credit | Width - credit | Short strike + credit |
Multiply every dollar figure by 100 for one spread. A quick self-check: max profit + max loss always equals the width x 100. For the bull call: $280 + $220 = $500. If your numbers do not add up to the width, something is wrong.
Choosing the width and the strikes
Wider spreads risk more and can earn more. Compare two bull call spreads on the same chain:
| Spread | Debit | Max loss | Max profit | Breakeven |
|---|---|---|---|---|
| Buy $100 / sell $105 | $2.20 | $220 | $280 | $102.20 |
| Buy $100 / sell $110 | $3.30 | $330 | $670 | $103.30 |
The wider spread has a better payoff ratio but needs a bigger move. Neither is "better". Pick the short strike where you think the move will run out, and the width that keeps the max loss inside your risk limit (see Position sizing).
Credit spreads have a different trade-off. The bull put spread above wins $100 and risks $400. It looks like a bad deal, but it also wins more often, because the stock only has to stay above $95. A rough rule from option pricing: if options are fairly priced, the higher chance of winning and the smaller payout roughly cancel out. A high win rate is not an edge on its own. Risk, reward and expectancy shows how to check this with your own trade records.
What can go wrong before expiration
- Early assignment on the short leg. Stock options are usually American style. If your short option goes deep in the money, or a short call is in the money just before an ex-dividend date, you can be assigned early. Your long leg still protects you, but you may suddenly hold 100 shares, or be short 100 shares, until you act.
- Pin risk at expiration. If the stock closes between your strikes, the short option is in the money and the long one is not. Take the bull put spread: if the stock closes at $93, the $95 put is assigned and you buy 100 shares for $9,500, while the $90 put expires. Your account may not have $9,500. If the stock gaps down over the weekend, you are now exposed below $90 too, because the protective put is gone. See Exercise and assignment.
- Fills and costs. Two legs means two bid-ask spreads and two sets of fees. On a $1 credit, a few cents of slippage on each leg is a big share of your profit. See Bid, ask and liquidity.
Try it
Pick a stock from your Watchlist and open its options chain for an expiration about 30 days out. Build one spread of each of the four types using real mid prices. For each, write in your trading journal: debit or credit, max profit, max loss, breakeven, and the self-check (max profit + max loss = width x 100). Sketch the payoff on paper. At expiration, check which of your four would have made money, and why.
- What is a vertical spread? Answer: Two options of the same type (both calls or both puts) with the same expiration and different strikes. You buy one and sell the other.
- You buy the $100 call for $4.00 and sell the $105 call for $1.80. What are the maximum loss, maximum profit and breakeven? Answer: Maximum loss $220 (the debit), maximum profit $280 (($5 - $2.20) x 100), breakeven $102.20.
- What quick self-check works for every vertical spread? Answer: Maximum profit plus maximum loss always equals the width x 100. For the $100/$105 bull call: $280 + $220 = $500.
- You sell the $95 put for $1.80 and buy the $90 put for $0.80. What are the credit, maximum loss and breakeven? Answer: A $100 credit, a maximum loss of $400 (($5 - $1.00) x 100), and a breakeven of $94.