Lesson

Vertical spread builder | Options Educator

Construct bull and bear verticals with defined risk and reward.

In this lesson

Vertical Spread Basics

  • A bull call spread buys the $100 call and sells the $110 call in the same expiration: it costs $3.43 − $0.61 = $2.82 a share, and that is the most you can lose
  • The most you can make is the $10 width minus the debit, $10.00 − $2.82 = $7.18, and the break-even is $102.82
  • A debit or a credit changes how you are paid, not the shape: selling the $110 put and buying the $100 put collects $7.18 and risks $2.82, the same payoff as the call version

How Time, Volatility and Width Change a Vertical

  • With the stock stuck at $100 the $100/$110 spread is worth $2.82 at the start, $2.08 after 18 days and $0 at expiration; at $105 it rises from $4.86 to $5.00 instead
  • The spread is worth $2.17 at 20% implied volatility, $2.82 at 30% and $3.20 at 40%, less than half the swing of the $100 call alone ($2.29 to $4.57)
  • Wider spreads cost more and can pay more: the $100/$105 costs $1.86 for a $3.14 maximum, the $100/$120 costs $3.37 for a $16.63 maximum

Choosing Strikes and Managing the Trade

  • Buy the strike near the current price and sell the strike at your target: the $100/$110 call spread breaks even at $102.82, the $105/$115 only at $106.37
  • Against the $100 call alone the spread costs $0.61 less but gives up the gain beyond $110: at $120 the call earns $16.57 and the spread $7.18
  • Take 50% to 70% of the maximum: with 15 days left and the stock at $110 the spread is worth $7.49, a profit of $4.67 or 65% of $7.18

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