Vertical Spreads: Bull and Bear Spreads

Buy one, sell one

The most common vertical spread is the bull call spread: buy a lower-strike Call and sell a higher-strike Call at the same time. The short leg brings back some of the premium, lowering the cost.

Profit capped, loss capped too

Maximum profit = difference between the strikes − net cost; maximum loss = net cost. It fits a view of “bullish, but not expecting a surge”. When bearish, use a bear put spread.

Pay first, or collect first?

If you're bullish, you can also sell a higher-strike Put and buy a lower-strike Put: a bull put spread collects money up front and profits from time; maximum loss = spread width − credit.

Key takeaways

• Bull call spread = buy a lower-strike call + sell a higher-strike call. Bullish, but not expecting a huge rally.
• Maximum gain = difference between the strikes − net cost; maximum loss = net cost.
• The short leg lowers the cost and also gives up the gains above it.
• A bull put spread (sell a higher-strike put, buy a lower-strike put) collects money upfront; maximum loss = spread width − credit received.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Look at “Max profit” and “Max loss”: do they add up to exactly the $10 distance between the strikes?
2. Increase the strike distance from $10 to $20: how do the cost, maximum profit and breakeven point change?
3. Drag “Elapsed” to the last day: how does the blue dashed line gradually turn into the yellow kinked line?
4. Switch to the bull put spread: does opening now bring in a “credit”? Drag the stock to $105 and $85: what's the P&L at expiration in each case?

Quiz and explanations

1. You buy the 100 call ($4) and sell the 110 call ($1.5). What's the maximum gain?

Answer: $7.5.Spread width $10 − net cost $2.5 = $7.5.

2. What's the breakeven in the question above?

Answer: $102.5.Lower strike $100 + net cost $2.5 = $102.5.

3. You sell the 100 put ($3.5) and buy the 95 put ($1.5). What's the maximum loss?

Answer: $3.Credit received $3.5 − $1.5 = $2; spread width $5 − $2 = $3.

Terms in this lesson

• bear put spread (Bear Put Spread): Buy a higher-strike put and sell a lower-strike put: bearish, with both cost and payoff capped.
• breakeven (Breakeven): The underlying price at expiration where you neither make nor lose money.
• bull call spread (Bull Call Spread): Buy a lower-strike call and sell a higher-strike call: bullish, giving up gains above the top strike in exchange for a lower cost.
• bull put spread (Bull Put Spread): Sell a higher-strike put and buy a lower-strike put, collecting cash up front; you keep it all if the stock stays above the higher strike, and the maximum loss is the spread width minus that credit.
• implied volatility (IV) (Implied Volatility (IV)): The volatility backed out of an option's market price, reflecting the market's expectation of future swings; the higher the IV, the pricier the option.
• net premium (Net Premium): Premium paid on long legs minus premium received on short legs; paying net is a debit, receiving net is a credit.
• premium (Premium): The price of an option, paid by the buyer to the seller; it's the most the buyer can lose.
• probability of profit (Probability of Profit): The estimated chance a position makes money at expiry based on current implied volatility; it's a model estimate, not a guarantee.
• vertical spread (Vertical Spread): Buying one option and selling another of the same type and expiry at a different strike, capping both profit and loss.