Vertical Spreads: Your First Multi-Leg Strategy
Learn vertical spreads—the gateway to advanced options strategies that limit your risk while maintaining profit potential.
What is Vertical Spread?
Vertical Spread is an options strategy using two options of the same type (calls or puts), same expiration, but different strike prices. It caps both max profit and max loss.
Vertical spreads are called 'vertical' because they use different strikes (vertical axis on chain). They're the building blocks of more complex strategies.
TL;DR - Quick Answer
Vertical spread = buy one option, sell another at different strike. Reduces cost and caps risk. Bull call spread = bullish, debit paid. Bear put spread = bearish, debit paid. Max loss = debit paid. Max gain = spread width - debit.
What Is a Vertical Spread?
A vertical spread combines two options: you buy one and sell another at a different strike price, same expiration.
The sold option offsets some cost and caps your max profit, but also caps your max loss.
Bull Call Spread (Debit)
Setup: Buy lower strike call, sell higher strike call
Direction: Bullish (want stock to rise)
Example: Stock at $100. Buy $100 call for $5, sell $105 call for $2. Net debit = $3.
Max Profit: Spread width - debit = $5 - $3 = $2 ($200 per contract)
Max Loss: Debit paid = $3 ($300 per contract)
Breakeven: Lower strike + debit = $103
Bear Put Spread (Debit)
Setup: Buy higher strike put, sell lower strike put
Direction: Bearish (want stock to fall)
Example: Stock at $100. Buy $100 put for $5, sell $95 put for $2. Net debit = $3.
Max Profit: $5 - $3 = $2 ($200 per contract)
Max Loss: $3 ($300 per contract)
Why Use Spreads?
- Lower cost than single options
- Defined, capped risk
- Reduced impact of IV crush
- Lower breakeven point
- Clear max loss known upfront
Key Takeaways
- Vertical spreads cap both profit and loss
- Bull call spread = bullish with defined risk
- Bear put spread = bearish with defined risk
- Max loss = debit paid
- Great for beginners learning multi-leg strategies
Related Options Strategies
Risk Management
Why defined risk matters.
Iron Condor
Next-level spread strategy.
Understanding related strategies helps you choose the best approach for your market outlook and risk tolerance. Each strategy has unique characteristics that make it suitable for different market conditions.
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