Definition of Vertical Spread
What is a Vertical Spread
A vertical spread is an option spread strategy that is created by using option contracts of the same underlying security, expiration date and option class but at different strike prices. Vertical spreads limit both the risk and the potential for return.
Difference Between a Call Spread and a Put Spread
A vertical spread that is created with call options is a call spread while a vertical spread created with put options is a put spread.
Vertical spreads can also be directionally bullish or bearish. When the vertical spread has a long lower strike price and a short higher strike price, it is a bullish vertical spread and when it has a short lower strike price and a long higher strike price, it is a bearish vertical spread.
Difference Between a Credit Spread and a Debit Spread
One additional thing to know about a vertical spread is that it will either be a credit spread or a debit spread. When the options sold are more expensive than the options you purchased, you will get paid premium or a credit when you open the strategy or position. When the options you purchased are more expensive than the options you sold, you will pay premium or a debit when you open the strategy or position.
Types of Vertical Spreads
There are four types of vertical spreads, each of which having a directional bias and purpose for the strategy.
- Bull Call Spread: long lower strike call + short higher strike call (Learn More…)
- Bear Call Spread: short lower strike call + long higher strike call (Learn More…)
- Bull Put Spread: long lower strike put + short higher strike put (Learn More…)
- Bear Put Spread: short lower strike put + long higher strike put (Learn More…)
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Related Investment Terms
Diagonal Spread
Horizontal Spread
Option Spread
