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Option Trading Subjects:

• Why Trade Stock Options?
• The Basics of Stock Options
• How to: Trading Stock Options
• How to read Option Graphs
• Option Trading Strategies by Outlook
• Vertical Spread Option Strategies
  • All Bull Call debit spread graphs
  • All Bull Put credit spread graphs
  • All Bear Call credit spread graphs
  • All Bear Put debit spread graphs
• How to: Diagonal Spreads
• Choosing a long option Strike Price
• Choosing an Option Expiration date
• Pyramid In or Average Out? : Option Buying Strategies, Option Selling Strategies
• Covered Call Strategies Disadvantages
• Percent to Double
• ETF Trading with Options
• Free Rides: Guaranteed Winning Trading Strategies?
• Delta-Neutral Trading Explained
• Stock Repair Strategy
• Stock Enhancement
• The Option Greeks
• Option Terms
• Trading Rules, Tips, Techniques
• Option Trading Books
• Options Trading Links
• Option Charts: Option-Graph Software

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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:

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.

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.