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What are vertical spreads in options trading?
Vertical spreads are a versatile options trading strategy that offers varying levels of risk. This guide explores different types of spreads, credit and debit variations, and key concepts like implied volatility.
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Visit help and support for more information.
Call 0800 409 6789 or email helpdesk.uk@ig.com if you have any questions about trading or investing. We're available 24/7 between 8am Saturday and 10pm Friday.
Contact us 0800 409 6789
Call 0800 195 3100 or email newaccounts.uk@ig.com to talk about opening an account.
Contact us 08001953100
Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.
Visit help and support for more information.
Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.
Visit help and support for more information.
Call 0800 409 6789 or email helpdesk.uk@ig.com if you have any questions about trading or investing. We're available 24/7 between 8am Saturday and 10pm Friday.
Contact us 0800 409 6789
The content on this page relates specifically to listed options, which can be traded using our US options and futures account.
What is a vertical spread?
A vertical spread is an options trading strategy that involves simultaneously opening long (buying) and short (selling) positions on the same underlying asset (the stock or other security the option is based on) with identical expiration dates but different strike prices (the price at which the option can be exercised or assigned). This directional strategy uses either put or call contracts for both positions.
The term ‘vertical’ is a reference to how the strike prices are positioned – one lower and the other higher, in the same expiration cycle. This is different to other spread types, such as calendar spreads, where the expiration dates differ.
How do vertical spreads work?
Vertical spreads enable you to speculate on market direction while defining both maximum profit and loss at the outset. The strategy involves taking offsetting positions, which – depending on the setup – results in either a credit or debit spread.
In a debit spread, the maximum loss is known at entry, so these positions are typically not actively managed. Credit spreads, however, may require management in certain situations to help control potential losses.
Calculating breakeven points
Knowing how to calculate breakeven points is crucial for assessing the potential profitability of a vertical spread:
- Long call spread: long call strike + net debit paid
- Short call spread: short call strike + net credit received
- Long put spread: long put strike - net debit paid
- Short put spread: short put strike - net credit received
The role of implied volatility
Implied volatility (IV) is a measure of how much the market expects an underlying’s price to change. It affects options prices:
- When IV is high, options prices are higher. Traders often sell options (credit spreads) to try benefit from potentially falling prices
- When IV is low, options prices are lower. Traders might buy options (debit spreads) as they're cheaper and could increase in value if market uncertainty grows
The implied volatility environment plays a crucial role in selecting the appropriate vertical spread strategy:
High IV environment | Low IV environment |
Favours selling premium (credit spreads) |
Favours buying premium (debit spreads) |
Consider short call spreads (bearish) or short put spreads (bullish) |
Consider long call spreads (bullish) or long put spreads (bearish) |
Aim to benefit from potential IV decrease |
Can serve as a hedge against short volatility risk in your portfolio |
Credit vs debit spreads
Vertical spreads are classified based on whether you receive or pay money when you open the trade:
- Credit spreads: you get money (credit) when you open the trade. You profit if the spread's value decreases
- Debit spreads: you pay money (debit) when you open the trade. You profit if the spread's value increases
Types of vertical spreads
There are four main types of vertical spreads:
- Long call spread (bullish)
- Short call spread (bearish)
- Long put spread (bearish)
- Short put spread (bullish)
Each type has unique characteristics in terms of profit potential, maximum loss and ideal market conditions.
Long call spread (bullish)
This strategy involves buying a call option and selling a higher strike call option in the same expiration cycle. It can be used when you expect a moderate rise in the underlying asset's price.
![Graph with an example of a long call spread, which has a bullish assumption.](http://a.c-dn.net/c/content/dam/igcom-websites/en_GB/images/charts/2024/08/19/1871295_Tasty_igcom_UK_ARTICLE_VERTICAL_SPREAD_Image1.png/jcr:content/renditions/original-size.webp)
Short call spread (bearish)
In this strategy, you’ll sell a call option and buy a higher strike call option in the same expiration cycle. It can be used when you’re expecting a decline or stability in the underlying asset's price.
![Graph with an example of a short call spread, which has a bearish assumption.](http://a.c-dn.net/c/content/dam/igcom-websites/en_GB/images/charts/2024/08/19/1871295_Tasty_igcom_UK_ARTICLE_VERTICAL_SPREAD_Image2.png/jcr:content/renditions/original-size.webp)
Long put spread (bearish)
This involves buying a put option and selling a lower strike put option in the same expiration cycle. It can be used when you’re expecting a moderate decline in the underlying asset's price.
![Graph with an example of a long put spread, which has a bearish assumption.](http://a.c-dn.net/c/content/dam/igcom-websites/en_GB/images/charts/2024/08/19/1871295_Tasty_igcom_UK_ARTICLE_VERTICAL_SPREAD_Image3.png/jcr:content/renditions/original-size.webp)
Short put spread (bullish)
Here, you'll sell a put option and buy a lower strike put option in the same expiration cycle. It can be used when you’re expecting an increase or stability in the underlying asset's price.
![Graph with an example of a short put spread, which has a bullish assumption.](http://a.c-dn.net/c/content/dam/igcom-websites/en_GB/images/charts/2024/08/19/1871295_Tasty_igcom_UK_ARTICLE_VERTICAL_SPREAD_Image4.png/jcr:content/renditions/original-size.webp)
Examples of vertical spreads
Vertical call debit spread
Let's illustrate a long call spread (bullish strategy) with a concrete example:
Consider a vertical call spread with the stock price at $50 at entry. In this strategy, you buy a $45 call for $6.50 and simultaneously sell a $51 call for $2, resulting in a net debit of $4.50. The breakeven price is $49.50, calculated by adding the $45 long call strike to the $4.50 premium paid.
Your maximum profit potential is $150, derived from the $6 spread width minus the $4.50 net premium, multiplied by the standard 100 shares per lot. Conversely, the maximum loss is limited to $450 (the $4.50 net premium paid multiplied by 100). If the stock price reaches $53 at expiration, your profit would be capped at $150, as it's above the short call strike of $51.
Vertical put credit spread
Now, let's look at a short put spread (bullish strategy) example:
Imagine you're looking at a stock trading at $120. You decide to sell a $110 put for $12 and simultaneously buy a $90 put for $4. This move nets you a credit of $8 right off the bat. Now, your breakeven price is $102 – that's your $110 short put strike minus your $8 net credit. If things go your way, you're looking at a maximum profit of $800 (that's your $8 net credit multiplied by the standard 100 shares per lot).
But don't forget, there's always risk involved. Your maximum loss is capped at $1,200, which is the $20 spread width minus your $8 net credit, multiplied by 100. If the stock price stays above $110 at expiration, you'll walk away with the full $800 profit.
Key considerations for vertical spreads
- Risk management: while vertical spreads have defined risk, proper management can help optimise outcomes
- Expiration handling: it's usually best to close your trade before the options expire to avoid complications
- Rolling: this means closing your current trade and opening a similar one with a later expiration date or different strike prices
- Legging out: this means closing one part of your spread while keeping the other open. It's risky and can change your potential profit or loss dramatically
You can trade vertical spreads in listed options on our US options and futures platform.