Vertical Spread

What is vertical spread?

A vertical spread is an options trading strategy where you buy and sell two options of the same type (either both calls or both puts) on the same asset, with different strike prices but the same expiration date. It’s designed to take advantage of market movements while keeping risk in check.

Types of Vertical Spreads

Bull Call Spread: Buy a call option at a lower strike price and sell one at a higher strike price. Profits when the asset’s price rises.

Bear Put Spread: Buy a put option at a higher strike price and sell one at a lower strike price. Profits when the asset’s price drops.

Short Call Spread: Sell a call option at a lower strike price and buy one at a higher strike price. Used when expecting the asset’s price to fall or remain stable.

Short Put Spread: Sell a put option at a higher strike price and buy one at a lower strike price. Profits when the asset’s price stays stable or rises.

Key Points

Defined Risk: Vertical spreads limit your potential loss to the net amount paid or received, which makes them safer than other options strategies.

Capped Profit: The maximum profit is limited and depends on the difference between the two strike prices minus the premium.

Market Direction: Vertical spreads are used to bet on the direction of the market while knowing the risk upfront.