What Is a Vertical Spread?

A vertical spread involves the simultaneous buying and selling of options of the same type (i.e., either puts or calls) and expiry, but at different 澳洲幸运5官方开奖结果体彩网:strike prices. The ter⛎m 'vertical' comes from the pos🗹ition of the strike prices.

This is in contrast to a horizontal, or 澳洲幸运5官方开奖结果体彩网:calendar spread, which is the simultaneous purchase and sale of the same option type with the same strike price, but with different 澳洲幸运5官方开奖结果体彩网:expiration dates.

Understanding Vertical Spreads

Traders will use a vertical spread when they expect a moderate move in the price of the 澳洲幸运5官方开奖结果体彩网:underlying asset. Vertical spreads are mainly directional plays and can be tailored to reflect the trader's view, beꦏarish or bullish, on the underlying asset.

Depending on the type of vertical spread deployed, the trader's account can either be credited or debited. Since a vertical spread involves both a purchase and a sale, the proceeds from writing an option will partially, or even fully, offset the premium required to purchase the other leg of this strategy, namely buying the option. The result is often a lower cost, lower risk trade than a 澳洲幸运5官方开奖结果体彩网:naked options position.

However, in return for lower risk, a vertical spread strategy will cap the profit potential as well. If an investor expects a substantial, 澳洲幸运5官方开奖结果体彩网:trend-like mo𓂃ve in th🌞e price of the underlying asset then a vertical spread is not an appropriate strategy.

Types of Vertical Spreads

There are several varieties of veඣrtical spreads.

Bulls

Bullish traders will use 澳洲幸运5官方开奖结果体彩网:bull call spreads and 澳洲幸运5官方开奖结果体彩网:bull put spreads. For both strategies, the trader buys the option with the lower strike price and sells the options with the higher strike price. Aside from the difference in the option types, the main variation is in the timing of the 澳洲幸运5官方开奖结果体彩网:cash flows. The bull call spread results in a net debit, while the bull put spread 澳洲幸运5官方开奖结果体彩网:🦋results in a net credit at the outset.

Bears

Bearish traders utilize 澳洲幸运5官方开奖结果体彩网:bear call spreads or 澳洲幸运5官方开奖结果体彩网:bear put spreads. For the💫se strategies, the trader sells the option with the lower strike price and buys the option with the higher strike price. Here, the bear put spread results in෴ a net debit, while the bear call spread results in a net credit to the trader's account.

Calculating Vertical Spread Profit and Loss

All examples do not include 澳洲幸运5官方开奖结果体彩网:commissions.

Bull call spread: (premiums result in a net debit)

• Max profit = the spread between the strike prices - net premium paid.
• Max loss = net premium paid.
• Breakeven point = long call's strike price + net premium paid.

Bear call spread: (premiums result in a net credit)

• Max profit = net premium received.
• Max loss = the spread between the strike prices - net premium received.
• Breakeven point = short call's strike price + net premium received.

Bull put spread: (premiums result in a net credit)

• Max profit = net premium received.
• Max loss = the spread between the strike prices - net premium received.
• Breakeven point = short put's strike price - net premium received.

Bear put spread: (premiums result in a net debit)

• Max profit = the spread between the strike prices - net premium paid.
• Max loss = net premium paid.
• Breakeven point = long put's strike price - net premium paid.

Real-World Example of a Bull Vertical Spread

An investor looking to bet on a stock moving higher may embark on a bull vertical call spread. The investor buys an option on Company ABC, whose stock is trading at $50 per share. The investor buys an 澳洲幸运5官方开奖结果体彩网:in the money (ITM) option with a strike price of $45 for $4 and sells an 澳洲幸运5官方开奖结果体彩网:out of the money (OTM) call with a strike price of $55 for $3.

At expiration, Company ABC’s stock trades at $49. In this case, the investor woul﷽d exercise their call, paying $45 and then selling for $49, netting a $4 profit. The call they sold expires worthless.

The $4 profit from the stock sale, plus the $3 pre♕mium and less the $4 premium paid, leaves a net profit of $3 for the spread.