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Vertical Spread Option Strategies

A "vertical" strategy, also known as a vertical spread, is one in which both long and short options of the same type are held, using different strike prices, with the same expiration date.

All vertical spreads offer a limited and known-in-advance maximum risk, and a limited and known-in-advance maximum gain.

Vertical spreads are very popular with options traders, because there is a vertical strategy to match almost any outlook for a stock. Because there are a large number of possibilities, choosing the right vertical for the situation can be confusing. This page attempts to clarify the choices as much as possible.

First, let's clarify what we mean by different strike prices. Using ATM, OTM, and ITM quickly gets confusing when talking about both puts and calls and a variety of strikes. Instead we'll use the designations below:

Strike Price
Designation
What that normally means for a stock currently at $50
What that normally means for a stock currently at $30
2 below current stock price
-2
40
25
1 below current stock price
-1
45
27.5
At current stock price
0
50
30
1 above current stock price
1
55
32.5
2 above current stock price
2
60
35

Bull Call Vertical Debit Spread

  • Description: long call at one strike, short call at a higher strike.
  • Outlook: always at least partially bullish.
  • Entry is always a debit and does not require margin after entry.
  • Max risk is always the initial debit.
  • Advantage of a bull call: if stock is over the lower strike at expiration, the long call can be exercised to buy stock if desired.
  • For a visual comparison, see All Bull Call debit spread graphs.

Bull Put Vertical Credit Spread

  • Description: long put at one strike, short put at a higher strike.
  • Outlook: always at least partially bullish.
  • Entry is always a credit and holding the spread requires margin.
  • Max risk is always (the difference in strike prices x the number of shares represented by contracts the initial credit).
  • Advantage of a bull put: if stock price is over one or both strike prices at expiration, the corresponding put(s) will expire worthless, saving commissions to exit.
  • For a visual comparison, see All Bull Put credit spread graphs.

Bull Calls and Bull Puts theoretically have the same profit graphs and same details, except for the debit or credit entries. In the market, you may find slightly better prices for one or the other, depending on the IV and relationship of the current stock price to the strike prices used.

Bull Call and Bull Put Details
Outlook
Lower Strike Designation
Upper Strike Designation
Typical max gain as a % of risk
Typical % down move needed to lose
Typical % up move needed to gain
What it means in plain English (assuming stock price rises to higher strike)
Neutral to mildly bullish
-2
-1
6%
11%
0%
Extremely good chance of a small gain
Neutral to bullish
-2
0
23%
4%
0%
Very good chance of a decent gain
Bullish
-2
1
55%
1%
0%
Better than even chance of a decent gain
Bullish
-2
2
100%
0%
0%
Even chance of a good gain
Neutral to bullish
-1
0
46%
3%
0%
Good chance of a decent gain
Bullish
-1
1
100%
0%
0%
Even chance of a good gain
Bullish
-1
2
180%
0%
1%
Below even chance of a large gain
Very bullish
0
1
230%
0%
3%
Low chance of a large gain
Very bullish
0
2
430%
0%
4%
Very low chance of a very large gain
Extremely bullish
1
2
1250%
0%
11%
Extremely low chance of a huge gain

Bear Call Vertical Credit Spread

  • Description: short call at one strike, long call at a higher strike.
  • Outlook: always at least partially bearish.
  • Entry is always a credit and holding the spread requires margin.
  • Max risk is always (the difference in strike prices x the number of shares represented by contracts the initial credit).
  • Advantage of a bear call: if stock price is under one or both strike prices at expiration, the corresponding call(s) will expire worthless, saving commissions to exit.
  • For a visual comparison, see All Bear Call credit spread graphs.

Bear Put Vertical Debit Spread

  • Description: short put at one strike, long put at a higher strike.
  • Outlook: always at least partially bearish.
  • Entry is always a debit and does not require margin after entry.
  • Max risk is always the initial debit.
  • Advantage of a bear put: if stock is under the upper strike at expiration, the long put can be exercised to short stock if desired.
  • For a visual comparison, see All Bear Put debit spread graphs.

Bear Calls and Bear Puts theoretically have the same profit graphs and same details, except for the debit or credit entries. In the market, you may find slightly better prices for one or the other, depending on the IV and relationship of the current stock price to the strike prices used.

Bear Call and Bear Put Details
Outlook
Lower Strike Designation
Upper Strike Designation
Typical max gain as a % of risk
Typical % up move needed to lose
Typical % down move needed to gain
What it means in plain English (assuming stock price falls to lower strike)
Extremely bearish
-2
-1
1620%
0%
11%
Extremely low chance of a huge gain
Very bearish
-2
0
430%
0%
4%
Very low chance of a very large gain
Very bearish
-2
1
180%
0%
1%
Below even chance of a large gain
Bearish
-2
2
100%
0%
0%
Even chance of a good gain
Bearish
-1
0
215%
0%
3%
Low chance of a large gain

Bearish

-1
1
100%
0%
0%
Even chance of a good gain
Neutral to bearish
-1
2
55%
1%
0%
Even chance of a decent gain
Neutral to bearish
0
1
44%
3%
0%
Good chance of a decent gain
Neutral to bearish
0
2
23%
4%
0%
Very good chance of a decent gain
Neutral to mildly bearish
1
2
8%
11%
0%
Extremely good chance of a small gain

 

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