# Vertical Spread in Options Trading: Definition, Types, and Strategies

## What Is a Vertical Spread?

Vertical spreads in options trading involve buying and selling options of the same type with the same expiration date but different strike prices. Traders use vertical spreads to anticipate moderate price movements in underlying assets. Whether taking a bullish or bearish outlook, these strategies offer limited risk and return potential, making them suitable for traders with specific market outlooks.

### Key Takeaways

*   A vertical spread involves buying and selling options of the same type and expiry date but at different strike prices.  
    
*   Traders use vertical spreads to reflect their forecast of an asset's moderate price movement, either bullish or bearish.  
    
*   Vertical spreads limit both the risk and the potential profit, making them safer than naked options.  
    
*   Bullish strategies involve bull call spreads and bull put spreads, while bearish strategies use bear call spreads and bear put spreads.  
    
*   Calculating profit and loss for vertical spreads depends on factors like strike price differences and net premiums paid or received.

![Vertical Spread: The simultaneous buying and selling of options of the same type and expiry, but at different strike prices.](https://www.investopedia.com/thmb/MTHszkpF1Q1_xGrggOrnBF-alGU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Vertical-Spread-sketch-68394d46ccb24ecead129500cb121961.png)

*Vertical Spreads can be used in both bullish and bearish markets.*

## Detailed Insights Into Vertical Spreads

[Traders](https://www.investopedia.com/terms/t/trader.asp) will use a vertical spread when they expect a moderate move in the price of the [underlying asset](https://www.investopedia.com/terms/u/underlying-asset.asp). Vertical spreads are primarily directional strategies and can be adjusted to match the trader's bullish or bearish outlook 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](https://www.investopedia.com/terms/w/writing-an-option.asp) an option will partially, or even fully, offset the premium required to purchase the other leg of this strategy, namely buying the option. This often results in a lower-cost, lower-risk trade compared to a [naked options](https://www.investopedia.com/terms/n/nakedoption.asp) position.

However, in exchange for lower risk, a vertical spread strategy also limits profit potential. If an investor expects a substantial, [trend-like](https://www.investopedia.com/terms/t/trending-market.asp) move in the price of the underlying asset then a vertical spread is not an appropriate strategy.

## Exploring Different Types of Vertical Spreads

There are several varieties of vertical spreads.

### Bulls

Bullish traders will use [bull call spreads](https://www.investopedia.com/terms/b/bullcallspread.asp) and [bull put spreads](https://www.investopedia.com/terms/b/bullputspread.asp). 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 [cash flows](https://www.investopedia.com/terms/c/cashflow.asp). The bull call spread results in a net debit, while the bull put spread [results in a net credit at the outset](https://www.investopedia.com/articles/optioninvestor/05/051005.asp).

### Bears

Bearish traders use [bear call](https://www.investopedia.com/terms/b/bearcallspread.asp) or [bear put spreads](https://www.investopedia.com/terms/b/bearputspread.asp). In these strategies, the trader sells the option with the lower strike price and buys the one with the higher strike price. For these 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.

![Bull Vertical Spread P&L at Expiration](https://www.investopedia.com/thmb/OW2JKSk_r2b1DYXIOQj8zgfudyk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Which_Vertical_Option_Spread_Should_You_Use_Sep_2020-03-34c346d142194e909757661f6cdcd95a.jpg)

*Bull Vertical Spread P&L at Expiration. — Image by Sabrina Jiang © Investopedia 2020*

## How to Calculate Profit and Loss in Vertical Spreads

Note that all examples exclude [commissions](https://www.investopedia.com/terms/c/commission.asp).

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

*   Max profit = the spread between the strike prices - net [premium](https://www.investopedia.com/terms/p/premium.asp) 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.

## Practical Example of a Bull Vertical Spread in Action

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 [in the money](https://www.investopedia.com/terms/i/inthemoney.asp) (ITM) option with a strike price of $45 for $4 and sells an [out of the money](https://www.investopedia.com/terms/o/outofthemoney.asp) (OTM) call with a strike price of $55 for $3.

At expiration, Company ABC’s stock trades at $49. In this case, the investor would 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 premium received, minus the $4 premium paid, results in a net profit of $3 for the spread.

## The Bottom Line

Vertical spreads are a versatile options trading strategy that allows traders to capitalize on moderate price movements of the underlying asset. By buying and selling options of the same type and expiration but at different strike prices, traders can limit risk and potential returns. Understanding the distinctions between bull and bear vertical spreads allows investors to tailor strategies to their market outlook. While vertical spreads can offer lower costs and reduced risk compared to naked options, they also cap profit potential, making them ideal for traders expecting only moderate asset price changes.