What are vertical spreads?
If you’ve looked into options trading before, you’ve likely heard the term "spread" thrown around. It sounds fancy, and maybe even a little intimidating — like the fromage board boasting Ossau-Iraty and Brillat-Savarin. At the end of the day, though, it’s just cheese, right?
A vertical spread is an options strategy. It’s when you buy and sell options on the same asset with the same expiration date, but with different strike prices (the agreed-upon future purchase/sell price).
Example of a vertical spread
Options contract 1 | Options contract 2 | |
|---|---|---|
| Asset | SAGE stock | SAGE stock |
| Expiration date | June 5, 2026 | June 5, 2026 |
| Strike price | $9.00 | $10.00 |
Each option contract is a different “leg” of the strategy, and the difference between the legs is the “spread.”
So why on earth would you do this? Fair question!
There are two main reasons:
1. You’re anticipating moderate price changes.
If you think an asset will move slightly up or down in price, a debit or credit spread can be customized to match your outlook.
2. You’re limiting risk.
This is the big benefit of debit and credit spreads. By trading two “legs” at the same time, risk automatically becomes limited.
Just like you can get a suit tailored to perfectly fit your body (and/or leave some room if all that cheese talk made you feel a certain way), vertical spreads can customize options trades to match your specific risk level.
These are defined risk options strategies, which means you know exactly how much you can gain or lose before you even hit "submit." No big surprises, no infinite losses.
Types of vertical spreads
The two main types of vertical spreads are debit spreads and credit spreads. The big difference between the two is where cash flows when the trade is opened (the premium).
A vertical spread where the premiums give your account an initial profit (a net credit) is called a credit spread.
A vertical spread where the premiums cost your account an initial amount (a net debit) is called a debit spread.
Understanding the debit spread strategy
What is a debit spread?
A debit spread is a strategy that has an initial net debit (a cost) to your account. This happens when the option you buy is more expensive than the option you sell and money is leaving your account.
When would you use a debit spread and how can you tell if it’s right for your situation? Here’s an example of a debit spread investor:
| Role | Net buyer |
|---|---|
| Perspective | "I'm willing to pay a small fee now because I think this asset is going to move, and I want to multiply my money." |
| Goal | I want the spread to increase in value. For example, they bought it for $1.00 and want to sell it later for $3.00. |
| Market outlook | Opinionated. Debit spreads are best used when you’re pretty sure the stock is going to move, and you think you know which way. |
| Risk/reward profile | Maximum loss: limited to the initial amount paid (the net debit). If the trade goes completely sideways, you can’t lose more than the cash you put up. Maximum profit: capped at the strike price, minus the initial amount paid |
Examples of debit spreads
There are two main types of debit spreads:
Bull call spreads (aka, long call vertical spreads)
This spread is for optimists. You use a bull call spread when you expect the asset’s price to rise moderately, buying a call option at a lower strike price (which is generally more expensive) and selling a call option at a higher strike price (which is generally cheaper).
Example:
Stock PEAR is trading at $50. After doing some analysis, you believe it will be going up in price slightly over the next two months.
| Asset | PEAR stock |
|---|---|
| Current trading price | $50 per share |
| Outlook | Bullish |
| Analysis | Looks like there may be a slight price increase coming over the next two months. |
[Contract 1] You buy a call option with a strike price of $50 per share that expires in 60 days. The contract is good for 100 shares at a cost of $2 per share.
[Contract 2] You also sell a call option with a strike price of $55 per share that expires in 60 days. The contract is good for 100 shares at a cost of $1 per share.
PEAR stock bull call spread
Options contract 1 | Options contract 2 | |
|---|---|---|
| Buying or selling | Buying | Selling |
| Call or put | Call | Call |
| Strike price | $50 | $55 |
| Max number of shares | 100 shares | 100 shares |
| Cost | $2 per share | $1 per share |
| Expiry date | In 60 days | In 60 days |
Because [Contract 1] costs you $2 per share for 100 shares for a total of $200, and [Contract 2] makes you $1 per share for a total of $100, the overall cost of this (or net debit) is $100. In a bull call spread, this is also the maximum loss.
Maximum loss / net debit - PEAR stock bull call spread
Formula
Maximum loss = (Options contract 2 cost x max number of shares) − (Options contract 1 cost x max number of shares)
Calculated
Maximum loss = ($1 x 100 shares) − ($2 x 100 shares)
Maximum loss = ($100) − ($200)
Maximum loss = − $100
The maximum gain of a bull call spread is the difference between the strike prices of the two options contracts minus the net premium paid. In this case, the maximum gain per share would be: [Contract 2 strike price] − [Contract 1 strike price] − the net premium. So: ($55) − ($50) − ($1) = $4 per share.
Since these contracts were good for up to 100 shares, we would multiply the $4 per share gain by 100 for the total maximum gain of $400.
Maximum gain - PEAR stock bull call spread
Formula
Maximum gain = (Options contract 2 strike price − options contract 1 strike price − the net debit per share) x max number of shares
Calculated
Maximum gain = ($55 − $50 − $1) x 100 shares
Maximum gain = ($4) x 100 shares
Maximum gain = $400
To calculate the breakeven price (the point where you would make back the initial net debit you spent to create the bull call spread), you need to add the lower-priced strike price and the net debit per share. In this case, that would be $50 + $1. So PEAR would need to reach $51 per share by the end of the 60-day contract period for you to make back the initial $100 you spent.
Breakeven asset price - PEAR stock bull call spread
Formula
Breakeven asset price = (Options contract 1 strike price) + (the net debit per share)
Calculated
Breakeven asset price = ($50) + ($1)
Breakeven asset price = $51
Bear put spreads (aka, long put vertical spreads)
This spread is for pessimists. You use a bear put spread when you expect an asset’s price to fall, buying a put option at a higher strike price (which is generally more expensive) and selling a put option at a lower strike price (which is generally cheaper)
Example
Stock PLUM is trading at $50 a share. After some analysis, you think PLUM stocks will be going down in price slightly over the next month.
| Asset | PLUM stock |
|---|---|
| Current trading price | $50 per share |
| Outlook | Bearish |
| Analysis | Looks like there may be a slight price decrease coming over the next month. |
[Contract 1] You buy a put option with a strike price of $40 per share that expires in 30 days. The contract is good for 100 shares at a cost of $4 per share.
[Contract 2] You also sell a put option with a strike price of $30 per share that expires in 30 days. The contract is good for 100 shares at a cost of $1 per share.
PLUM stock bear put spread
Options contract 1 | Options contract 2 | |
|---|---|---|
| Buying or selling | Buying | Selling |
| Call or put | Put | Put |
| Strike price | $40 | $30 |
| Max number of shares | 100 shares | 100 shares |
| Cost | $4 per share | $1 per share |
| Expiry date | In 30 days | In 30 days |
Because [Contract 1] costs you $4 per share for 100 shares for a total of $400, and [Contract 2] makes you $1 per share for a total of $100, the overall cost of this (or net debit) is $300.
Net debit - PLUM stock bear put spread
Formula
Net debit = (Options contract 2 cost x max number of shares) − (Options contract 1 cost x max number of shares)
Calculated
Net debit = ($1 x 100 shares) − ($4 x 100 shares)
Net debit = ($100) − ($400)
Net debit = − $300
The maximum gain of a bear put spread is the difference between the strike prices of the two options contracts minus the net premium paid. In this case, the maximum gain per share would be: [Contract 1 strike price] − [Contract 2 strike price] − the net premium. So: ($40) − ($30) − ($3) = $7 per share.
Since these contracts were good for up to 100 shares, we would multiply the $7 per share gain by 100 for the total maximum gain of $700.
Maximum gain - PLUM stock bear put spread
Formula
Maximum gain = (Options contract 1 strike price − options contract 2 strike price − the net debit per share) x max number of shares
Calculated
Maximum gain = ($40 − $30 - $3) x 100 shares
Maximum gain = ($7) x 100 shares
Maximum gain = $700
To calculate the breakeven price (the point where you would make back the initial net debit you spent to create the bear put spread), you need to take the higher strike price and subtract the net debit per share. In this case, that would be $40 − $3. So PLUM would need to reach $37 per share by the end of the 30-day contract period for you to make back the initial $300 you spent.
Breakeven asset price - PLUM stock bear put spread
Formula
Breakeven asset price = (Options contract 1 strike price) − (the net debit per share)
Calculated
Breakeven asset price = ($40) − ($3)
Breakeven asset price = $37
How debit spreads are affected by time and volatility
If you’re planning on using debit spreads yourself, it’s important to keep in mind these factors before making a trade:
Time decay (theta):
Theta is your enemy.
You paid for this position, and just like a carton of milk, it spoils over time. (Apologies to the lactose-intolerant among us. This has been a rough one.) Every day the stock doesn't move in your favour is a day you lose a little value.
You need the stock to move, and you need it to move sooner rather than later.
Implied volatility (IV):
If the market is a lake, IV is how choppy or calm the water is.
Generally, you want to buy debit spreads when volatility is low. But if volatility spikes after you buy, the value of the option you own tends to increase faster than the one you sold.
Understanding the credit spread strategy
Now let's flip the script. In the world of options strategies, the credit spread is the opposite of a debit spread when it comes to the initial cash flow.
What is a credit spread?
A credit spread has an initial net credit (a profit) to your account. You collect cash up front because the option that you sell is more expensive than the one you buy.
When would you use a credit spread and how can you tell if it’s right for your situation? Here’s an example of a credit spread investor:
| Role | Net seller |
|---|---|
| Perspective | "I don't know exactly where the stock is going, but I'm pretty sure it's not going over there." |
| Goal | You want both options to expire worthless. For example, you collected $1 up front, and if it expires worth $0, then you keep that $1. |
| Market outlook | Opinionated. Credit spreads are best used in neutral or moderately directional markets. |
| Risk/reward profile | Maximum loss: your loss is the difference between the strike prices minus the credit you received. Maximum profit: limited to the cash you received at the start (the net credit). You can never make more than that initial payment. |
Examples of credit spreads
There are two main types of credit spreads:
Bull put spread
A bull put spread is used when you are bullish or neutral about an asset. You sell a put option at a higher strike price (which is generally more expensive) and buy a put option at a lower strike price (which is generally cheaper) as a form of insurance.
Example
Stock CORN is trading at $260 a share. After researching CORN, you believe that it will be going up slightly in price over the next three months.
| Asset | CORN stock |
|---|---|
| Current trading price | $260 per share |
| Outlook | Bullish |
| Analysis | Looks like there may be a slight price increase coming over the next three months. |
[Contract 1] You sell a put option with a strike price of $270 per share that expires in 90 days. The contract is good for 100 shares at a cost of $8.50 per share.
[Contract 2] You buy a put option with a strike price of $260 per share that expires in 90 days. The contract is good for 100 shares at a cost of $2.00 per share.
CORN stock bull put spread
Options contract 1 | Options contract 2 | |
|---|---|---|
| Buying or selling | Selling | Buying |
| Call or put | Put | Put |
| Strike price | $270 | $260 |
| Max number of shares | 100 shares | 100 shares |
| Cost | $8.50 per share | $2 per share |
| Expiry date | In 90 days | In 90 days |
Because [Contract 1] makes you $8.50 per share for 100 shares, totalling $850, and [Contract 2] costs you $2 per share for a total of $200, the net credit and max profit of this is $650.
Maximum profit / net credit - CORN stock bull put spread
Formula
Maximum profit = (Options contract 1 cost x max number of shares) − (Options contract 2 cost x max number of shares)
Calculated
Maximum profit = ($8.50 x 100 shares) − ($2 x 100 shares)
Maximum profit = ($850) − ($200)
Maximum profit = $650
The maximum loss of a bull put spread is the difference between the strike prices of the two options contracts minus the net premium paid.
In this case, the maximum loss per share would be: [Contract 1 strike price] − [Contract 2 strike price] − the net premium. So: ($270) − ($260) − ($6.50) = $3.50 per share.
Since these contracts were good for up to 100 shares, we would multiply the $3.50 per share loss by 100 for the total maximum loss of $350.
Maximum loss - CORN stock bull put spread
Formula
Maximum loss = (Options contract 1 strike price − options contract 2 strike price − the net premium per share) x max number of shares
Calculated
Maximum loss = ($270 − $260 − $6.50) x 100 shares
Maximum loss = ($3.50) x 100 shares
Maximum loss = $350
To calculate the breakeven price (the point where you would make back the initial net debit you spent to create the bull put spread), you need to subtract the net credit per share from the higher (short) strike price. In this case, that would be $270 − $6.50. So CORN would need to stay above $263.50 per share by the end of the 90-day contract period for you to keep some profit.
Breakeven asset price - CORN stock bull put spread
Formula
Breakeven asset price = (Options contract 1 strike price) − (the net credit per share)
Calculated
Breakeven asset price = ($270) + ($6.50)
Breakeven asset price = $263.50
Bear call spread
A bear call spread can be useful when you think an asset will stay below a certain price or will decline moderately. In that case, you sell a call option at a lower strike price (which generally costs more) and buy a call option at a higher strike price (which generally costs less). As long as the underlying asset doesn't rally past your short strike, you keep the credit.
Example
Stock KALE is trading at $130 a share. After doing some research about KALE, you think their stocks will be going down in price slightly over the next month.
| Asset | KALE stock |
|---|---|
| Current trading price | $130 per share |
| Outlook | Bearish |
| Analysis | Looks like there may be a slight price decrease coming over the next month. |
[Contract 1] You buy a call option with a strike price of $130 per share that expires in 30 days. The contract is good for 100 shares at a cost of $1.50 per share.
[Contract 2] You also sell a call option with a strike price of $125 per share that expires in 30 days. The contract is good for 100 shares at a cost of $5.00 per share.
KALE stock bear call spread
Options contract 1 | Options contract 2 | |
|---|---|---|
| Buying or selling | Buying | Selling |
| Call or put | Call | Call |
| Strike price | $130 | $125 |
| Max number of shares | 100 shares | 100 shares |
| Cost | $1.50 per share | $5 per share |
| Expiry date | In 30 days | In 30 days |
Because [Contract 1] costs you $1.50 per share for 100 shares for a total of $150, and [Contract 2] makes you $5 per share for a total of $500, the overall profit of this (or net credit) is $350.
Net credit - KALE stock bear call spread
Formula
Net credit = (Options contract 2 cost x max number of shares) − (Options contract 1 cost x max number of shares)
Calculated
Net credit = ($5 x 100 shares) − ($1.50 x 100 shares)
Net credit = ($500) − ($150)
Net credit = $350
The maximum loss of a bear call spread is the difference between the strike prices of the two options contracts minus the net credit.
In this case, the maximum loss per share would be: ($130) − ($125) − ($3.50) = $1.50 per share.
Since these contracts were good for up to 100 shares, we would multiply the $1.50 per share loss by 100 for the total maximum loss of $150.
Maximum loss - KALE stock bear call spread
Formula
Maximum loss = (Options contract 1 strike price − options contract 2 strike price − the net credit per share) x max number of shares
Calculated
Maximum loss = ($130 − $125 − $3.50) x 100 shares
Maximum loss = ($1.50) x 100 shares
Maximum loss = $150
To calculate the breakeven price (the point where you would make back the initial net debit you spent to create the bear call spread), you need to add the net credit per share to the lower (short) strike price. In this case, that would be $125 + $3.50. So KALE would need to stay below $128.50 per share by the end of the 30-day contract period for you to keep some profit.
Breakeven asset price - KALE stock bear call spread
Formula
Breakeven asset price = (Options contract 2 strike price) + (the net credit per share)
Calculated
Breakeven asset price = ($125) + ($3.50)
Breakeven asset price = $128.50
How credit spreads are affected by time and volatility
If you’re planning on using credit spreads yourself, it’s important to consider how these factors will impact the trade before you dive in:
Time decay (theta):
For the most part, theta is your bestie.
You sold something that’s expiring. You want it to rot!
Every day the stock does nothing is a good day for you.
Implied volatility (IV):
This is your enemy, even though it might seem wrong.
You generally want to start by selling credit spreads when volatility is high. That’s because high volatility can inflate options premiums, and inflated premiums mean a larger initial credit for you!
After the sale, however, you want volatility to drop so you can close with a profit. If volatility explodes after your sale, that can really hurt your spread!
Debit spread vs. credit spread: choosing your strategy
It can be hard to keep these straight. Here is a cheat sheet of the main features to reference and help you decide which tool (debit or credit) could be applied to an asset:
Debit spread (the buyer) | Credit spread (the seller) | |
|---|---|---|
| Initial cash flow | Net debit (You pay money) | Net credit (You receive money) |
| Max loss | The initial money you paid | Strike width minus net credit |
| Max profit | Strike width minus net debit | The initial money you received |
| Time decay (theta) | Works against you | Works in your favour |
| IV | Ideally enter when IV is low | Ideally enter when IV is high |
| Market outlook | Strong directional moves are anticipated | Neutral or range-bound moves are anticipated |
When to use each strategy
Just because an asset looks like it could be ripe for a bear put spread, for example, doesn’t necessarily mean that you’re in a place where engaging that strategy makes sense.
These investor profiles can help you identify which strategy works for you personally:
Choose a debit spread when: | Choose a credit spread when: |
|---|---|
| You’re confident the asset is going to move up or down. | You’re anticipating the market will move sideways. |
| You’re an aggressive investor. | You’re a conservative investor. |
| You’re comfortable with risking a small amount of capital (the debit) to potentially make a larger return. | You’re comfortable with prioritizing a higher probability of profit over a huge payday. |
Trading requirements
There is one administrative hurdle to keep in mind before diving into these options spreads:
It’s important to check whether your brokerage requires a margin account for the spread you’re looking to execute.
Debit spreads
These usually require a lower level of options approval. That means you generally don't need a margin account because you paid for the trade in full up front.
Credit spreads
These spreads often require a higher level of options approval and a margin account. Because credit spreads involve selling options to open a position, brokerages often view them as riskier (even though the risk is defined). They need to ensure you have the capital to cover the difference in the strikes if the trade goes against you.
