A vertical spread combines a long and a short option of the same type (both calls or both puts) with the same expiry but different strikes. The result caps both the maximum profit and the maximum loss, in exchange for a dramatically lower capital requirement than a naked option.
Bull Put Spread (a Credit Spread)
Sell a put at a higher strike and buy a put at a lower strike, both expiring the same date. You collect a net credit, and profit if the underlying stays above the short strike through expiry. It's a bullish-to-neutral strategy with defined maximum loss.
Max Profit = Net Credit Received | Max Loss = (Strike Width − Net Credit) × 100Bear Call Spread (a Credit Spread)
Sell a call at a lower strike and buy a call at a higher strike. This collects a credit and profits if the underlying stays below the short strike — a bearish-to-neutral counterpart to the bull put spread.
Worked Example
Stock trades at $150. Sell the $145 put for $3.00, buy the $140 put for $1.50. Net credit = $1.50 ($150 per contract). Strike width = $5. Max profit = $150. Max loss = ($5 − $1.50) × 100 = $350. Breakeven = $145 − $1.50 = $143.50.
| Spread Type | Direction | Cash Flow | Profits When |
|---|---|---|---|
| Bull call spread | Bullish | Debit (pay upfront) | Underlying rises above breakeven |
| Bear put spread | Bearish | Debit (pay upfront) | Underlying falls below breakeven |
| Bull put spread | Bullish/neutral | Credit (receive upfront) | Underlying stays above short strike |
| Bear call spread | Bearish/neutral | Credit (receive upfront) | Underlying stays below short strike |
A well-placed credit spread with the short strike outside a reasonable probability range can profit even if the underlying goes nowhere, purely from theta decay working in the seller's favor.
Why Traders Choose Spreads Over Naked Options
- ▸Defined maximum loss — no risk of a naked short position blowing through a stop.
- ▸Lower margin requirement than a naked short option, freeing capital for diversification.
- ▸Reduced vega exposure compared to a single option, since the long and short legs partially offset.
The tradeoff is capped upside: a bull call spread's maximum profit is the width of the strikes minus the debit paid, no matter how far the stock rallies. That's the price of trading unlimited potential for a controlled, calculable risk.