What Is Vertical Spread?
A vertical spread involves buying one option and selling another of the same type and expiration but at a different strike. Bull call spreads (buy lower call, sell higher call) profit from upward moves; bear put spreads (buy higher put, sell lower put) profit from downward moves.
Verticals cap both maximum profit and maximum loss, which is their main advantage over naked long options. The trader pays a smaller net debit (or receives a smaller credit) than they would for a single option, with defined risk and known break-even points.
Most directional options trades should use vertical spreads rather than naked options. The defined risk lets you size positions confidently. Bull/bear call/put spreads form the toolkit for most directional options trading; pure long calls/puts make sense only when expecting large, fast moves.
Related terms
- Options Contract — A derivative giving the right (but not obligation) to buy or sell an asset at a set price by a set date.
- Delta — Sensitivity of an option's price to a $1 change in the underlying.
- Calendar Spread — Buying a longer-dated option and selling a shorter-dated option at the same strike.
- Iron Condor — Four-leg neutral strategy collecting premium when the underlying stays in a range.