A single long call has a problem: you pay for every dollar of upside, including the dollars you do not expect to see. A vertical spread fixes that. You buy one option and sell another of the same type and expiration at a different strike. The sold option pays for part of the bought one, and in return you give up any gain beyond the sold strike. Every vertical is that trade: a cap on what you can make, in exchange for a smaller cost or a smaller risk.
The four verticals
Two strikes, calls or puts, buy the lower or buy the higher. That gives four spreads, and they sort into two families.
- Bull call spread: buy the lower call, sell the higher call. You pay a net debit. Profits if the stock rises.
- Bear put spread: buy the higher put, sell the lower put. Net debit. Profits if the stock falls.
- Bull put spread: sell the higher put, buy the lower put. You receive a net credit. Profits if the stock stays up.
- Bear call spread: sell the lower call, buy the higher call. Net credit. Profits if the stock stays down.
The first two are debit spreads: you pay, and the most you can lose is what you paid. The second two are credit spreads: you are paid, and the most you can lose is the distance between the strikes minus what you were paid.
Debit spread arithmetic
Take a stock at $100. The $100 call trades at $4.00 and the $105 call at $2.00. Buy the $100, sell the $105, and you pay $2.00 a share, $200 for one spread. The distance between the strikes is called the width, here $5.
- Max loss: the debit, $2.00. Below $100 both calls expire worthless.
- Max profit: width minus debit, $5.00 minus $2.00 = $3.00. Above $105 the spread is worth exactly $5, and you paid $2.
- Breakeven: long strike plus debit, $102.
A debit spread on a $100 stock, bought with 30 days left at 30% volatility. Read the breakeven off the chart, then drag days down and watch the green line bend toward the black expiry ramp: floor at the debit, ceiling at the width minus the debit.
Credit spread arithmetic
Now the same strikes with puts. The $105 put trades at $6.80 and the $100 put at $3.80. Sell the $105, buy the $100, and you collect $3.00 a share.
- Max profit: the credit, $3.00. Above $105 both puts expire worthless and you keep it all.
- Max loss: width minus credit, $5.00 minus $3.00 = $2.00. Below $100 the spread is worth the full $5 against you.
- Breakeven: short strike minus credit, $102.
The same two strikes with puts, sold for a credit. Compare it with the chart above: the same ramp, the same breakeven, the same floor and ceiling within a couple of cents. Move volatility on both charts and they move together.
Same trade, two wrappers
Put the two examples side by side. Same strikes, same $102 breakeven, make $3 or lose $2 either way. That is no coincidence. Put-call parity, from module 2, ties them together: a call spread and a put spread on the same two strikes must add up to the width, give or take the interest on it. Debit plus credit equals $5. The bull call spread you buy and the bull put spread you sell are one position written two ways. Which wrapper you use comes down to which legs are out of the money, since those are easier to trade, and to what happens at expiration, which module 10 covers.
Before expiry, the spread creeps toward its width
At expiry a vertical is worth somewhere between zero and the width. Before expiry it is worth less than the full width even when the stock is well past both strikes, because there is still time for the stock to come back. With 30 days left and 30% volatility, the $100/$105 call spread is worth about $3.03 with the stock at $105 and about $3.94 with the stock at $110. You collect the last dollar only by holding toward expiry or by the stock running further.
Spread value against the stock price with 60, 20 and 5 days left; the dashed line is the value at expiry. Hover at $110 to see how far below $5 each line sits. Raise volatility and every line flattens away from the width.
The lines squeeze toward the dashed expiry ramp as the days run out. That is why many traders close a winning vertical at 75 to 80% of its width: the last slice takes the most time to arrive and is exposed to a reversal the whole way.
The maths: max profit, max loss, breakeven and parity
Strikes K1 < K2, width W = K2 - K1. A bull call spread bought for a debit D: max loss = D, max profit = W - D, breakeven = K1 + D. A bull put spread sold for a credit C: max profit = C, max loss = W - C, breakeven = K2 - C. Multiply by 100 for one contract.
Parity at one strike K: C(K) - P(K) = S·e^(-qT) - K·e^(-rT), where C and P are the call and put prices, S the stock, q the dividend yield, r the interest rate and T the years left. Write it at K1 and at K2 and subtract. The stock and dividend terms cancel and you are left with [C(K1) - C(K2)] + [P(K2) - P(K1)] = W·e^(-rT). The first bracket is the call spread's debit, the second the put spread's credit.
Worked example: W = $5, r = 4%, 30 days. e^(-0.04 × 30/365) = 0.99672, so debit plus credit comes to $4.98, not $5.00. The 2 cents is a month's interest on $5.
So C is about W - D: the put seller's max profit is the call buyer's, the max losses match, and the breakevens agree, since K2 - C = K1 + W - C = K1 + D. Same trade, apart from that small interest term.
Your turn
Open the AAPL chain and price a one-strike bull call spread from the mids, build it in the Strategy Lab, and check that the Lab agrees with you. Then price the matching bull put spread on AMZN through the Credit Spread Calc and see the two sides add up to the width.