Definition
Vertical Spread
A vertical spread buys and sells two options of the same type and expiry but different strikes, capping both risk and reward.
Vertical spreads — bull call, bear put, bull put, and bear call — all share one expiry and differ only in strike. Buying the nearer strike and selling the farther one creates a defined-risk, defined-reward position whose cost (or credit) and maximum profit depend on the gap between strikes.
They are the workhorse of Indian defined-risk options trading on Nifty, Bank Nifty, and stocks because the second leg lowers cost and slashes SPAN margin versus a naked option. Choosing debit (paying) or credit (collecting) verticals depends on whether the trader wants to buy or sell premium.
Related terms
- Bull Call SpreadA bull call spread buys a lower-strike call and sells a higher-strike call to bet on a moderate rise at lower cost.
- Bear Put SpreadA bear put spread buys a higher-strike put and sells a lower-strike put to profit from a moderate fall at lower cost.
- Bull Put SpreadA bull put spread sells a higher-strike put and buys a lower-strike put to earn premium with a mildly bullish view.
- Iron CondorAn iron condor sells an out-of-the-money call spread and put spread to earn premium in a range-bound market with defined risk.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.