Vertical Call and Put Spreads Option Strategy

A vertical call spread is the buying of one or more calls (puts) and selling of one or more calls (puts) of a different strike but the same expiration. Buying one September 100 call for $5 and selling one September 105 call for $3 is an example of a vertical call spread. The total cash outlay is $2 (called a $2 debit) which is the difference between the 100 and 105 call ($5 - $3 = $2), so the most which can be lost is $2. The maximum possible profit is $3 which is the difference between the two strikes minus the purchase price of the spread ($5 - $2 = $3).

A vertical put spread is the buying of one or more puts and selling of one or more puts of a different strike but same expiration. An example of buying a put spread is buying the October 100 put for $5 and selling the October 95 put for $2, for a $3 debit. The put spread has some characteristics similar to a call spread in that the profit and loss potential is limited, but now the investor anticipates the market will decline. The maximum possible loss for this spread is the $3 purchase price, whereas the maximum possible profit is $2 ($5 - $3 = $2).

Selling a vertical call spread is the sale of a lower strike call against the purchase of a higher strike call with the same expiration. The sale of the November 100 call for $5 and the purchase of the November 105 call for $3 is an example of selling a call spread for $2.

This is similar to buying a put spread, but there are important distinctions. For example, at expiration a profit is realized if the market is below 102 when selling the call spread but a profit is not realized until the market is below 97 when buying the put spread. The purchase of a put spread or sale of a call spread are examples of bear spreads because the investor expects the market to decline.

Selling a vertical put spread is the sale of a higher strike put against the purchase of a lower strike put with the same expiration. The purchase of the December 95 put for $2 and sale of the 100 put for $5 is an example of selling a put spread for a $3 credit.

This is similar to buying the call spread, but again there are distinctions. At expiration a profit is realized if the market is above 97 when selling the put spread, but a profit is not realized until the market is above the 102 level when buying the September call spread for $2. The purchase of a call spread or sale of a put spread are examples of bull spreads because the investor will profit if the market rises.

"Vertical" call and put spreads are usually termed just call or put spreads. Profits and losses are limited in buying or selling a call spread, which makes them appealing to many investors. If you are bullish, which is the better choice-buying the call spread or selling the put spread? If you are bearish which is better-buying the put spread or selling the call spread? The answer to this question is partly a function of the proper valuation of the options, which will be investigated later.