Vertical Spreads - A Closer Look at Defined-Risk Option Strategies

Vertical spreads are a common way to trade options while keeping both risk and reward in check. But how do they actually work? And when should you use a vertical call spread or a vertical put spread? This article breaks down the structure, logic, and trade-offs behind every type of vertical trade.

Key Takeaways

• A vertical spread is a strategy where you buy and sell options of the same type and expiry but with different strikes. The most common are vertical call spreads (bull call, bear call) and vertical put spreads (bear put, bull put).
• Bull call and bear put spreads are debit strategies, you pay money to initiate the trade. Bear call and bull put spreads are credit strategies, you receive money upfront when opening the trade.
• Vertical spreads define both your max profit and max loss. They're useful for making directional bets while managing risk.

What Is a Vertical Spread?

A vertical spread is an options trade where you buy and sell contracts of the same type (both calls or both puts), with the same expiration date, but different strike prices. It’s called “vertical” because strike prices are listed vertically on an options chain, while a horizontal spread (or calendar spread) uses the same strike but different expirations.

Vertical spreads come in two flavors:

• Vertical call spread - uses calls to trade a bullish or bearish view
• Vertical put spread - uses puts for a bearish or bullish view

Every vertical trade falls into one of four types:

• Bull call spread, a.k.a. “long call spread” (debit)
• Bear call spread, a.k.a. “short call spread” (credit)
• Bear put spread, a.k.a. “long put spread” (debit)
• Bull put spread, a.k.a. “short put spread” (credit)

Typically, your P&L will have one of these two shapes, depending on the strategy you select:

Whether the spread is a debit or a credit depends on which option is more expensive: if you pay more to enter, it’s a debit; if you receive more, it’s a credit. Each setup defines both your max risk and your max reward upfront.

How Vertical Spreads Work

To set up a vertical spread, you open two positions at the same time: buy one option and sell another of the same type (both calls or both puts), same expiration, but different strikes. That’s the core of any vertical trade.

The price difference between the two legs gives you either:

• A net debit (you pay to enter the trade)
• A net credit (you receive money upfront)

This initial cost or credit also defines your maximum possible loss or gain. That’s the appeal of vertical spreads—your risk and reward are locked in from the start.

The choice between a vertical call spread or a vertical put spread depends on your market outlook:

• Bullish? Use a bull call or bull put spread
• Bearish? Go with a bear call or bear put spread

Implied volatility also matters. In low IV, debit spreads may be more attractive. In high IV, credit spreads tend to offer better setups.

Vertical Call Spread

A vertical call spread is a defined-risk options strategy used when you expect a stock to move (either up or stay flat) depending on how you set it up. There are two main versions, each structured to match a specific market outlook.

Bull Call Spread

A bull call spread (or “long call spread”) is a vertical trade used when you expect a moderate upward move in the stock. You buy a lower strike call and sell a higher strike call, both with the same expiration. Because the long call is more expensive, this setup results in a net debit. The bull call spread P&L graph typically looks like this:

• Max loss: net premium paid
• Max profit: difference between strike prices minus premium paid
• Breakeven: lower strike + premium paid

Example (ALAB)

ALAB is trading at $58.96. You can open a bull call spread by buying the $62 call and selling the $63 call, both expiring in one week. The net cost is $10, and this is your P&L (as found on our screener for options):

In short:

• If ALAB closes above $63, you make a $90 profit.
• If it stays below $62, you lose the $10 paid.

It’s a small-risk setup with a defined, attractive reward.

Bear Call Spread

A bear call spread (or “short call spread”) is used when you expect the stock to stay below a resistance level. You sell a lower strike call and buy a higher strike call, creating a net credit at entry. The classic P&L of a bear call spread looks like this:

• Max profit: net premium received
• Max loss: difference in strikes minus premium received
• Breakeven: short strike + premium received

Example (ORCL)

ORCL is trading at $128.62. You sell the $143 call and buy the $146 call, both expiring in five weeks. This spread gives you $85 in credit. Your P&L would look like this:

The main takeaways of this chart are:

• If ORCL stays below $143.85, you keep the credit (and if the stock goes below $143, you keep the entire credit).
• If it rises above $146, your loss is capped at $215.

This vertical spread can be a good move when you want defined risk and expect the stock to stay under a ceiling.

Vertical Put Spread

A vertical put spread is a defined-risk options setup that can be either bearish or bullish, depending on how you position it. Like vertical call spreads, it’s all about strike selection and direction.

Bear Put Spread

A bear put spread (also known as long put spread) is a vertical trade used when you expect the stock to decline moderately. You buy a higher strike put and sell a lower strike put, both with the same expiration. Since the long put costs more, this setup results in a net debit. Your bear put spread P&L graph will normally have this shape:

• Max loss: net premium paid
• Max profit: difference between strike prices minus premium paid
• Breakeven: higher strike - premium paid

Example (SBUX)

SBUX is trading at $81.50. You buy the $79 put and sell the $77 put, both expiring in one week. The cost of this vertical spread is $31.50, with the following P&L profile:

• If SBUX drops below $77, your max profit is $168.50
• If it stays above $79, your loss is limited to $31.50

This is a clean, low-risk trade if you think the stock is headed lower but not crashing.

Bull Put Spread

A bull put spread (or short put spread) is used when you expect the stock to stay above a support level. You sell a higher strike put and buy a lower strike put, creating a net credit at entry. The typical bull put spread P&L chart is the following one:

• Max profit: net premium received
• Max loss: difference between strikes minus premium received
• Breakeven: short strike - premium received

Example (ANF)

ANF is trading at $72.98. You sell the $61 put and buy the $51 put, both expiring in six weeks. You receive $125 in premium, and your P&L will look exactly like this:

• If ANF stays above $59.75, you make a profit (even better, if it remains above $61 you can keep the whole credit)
• If it drops below $51, your loss is capped at $475

This vertical spread offers a decent income if you believe the stock will hold its ground. But keep in mind: earnings or other catalysts can change the picture fast. Know the calendar before you commit.

Credit vs Debit Spreads: What's the Difference?

Whether a vertical spread is a credit or debit comes down to which leg is more expensive. If you pay more for the long option than you collect from the short one, it’s a debit spread. If you receive more from the short leg than you pay for the long, it’s a credit spread.

• Debit spreads (like the long call spread or long put spread) require upfront capital but offer more control over your max loss.
• Credit spreads (like the short call spread or short put spread) bring in premium at entry, but carry more risk if the trade moves against you.

Your breakeven shifts based on the net premium paid or received. Credit spreads tend to benefit from time decay, especially in high implied volatility environments. Debit spreads, on the other hand, work better when IV is low and you expect movement.

Managing a Vertical Trade

Traders often close a vertical spread before expiration to lock in profits or cut losses early. One helpful habit that comes from our experience: if the trade hits 50% of max profit quickly, consider taking it off. Fast profits can reverse just as fast.

Debit spreads (like a bull call or bear put spread) are usually left alone if they don’t work out. The max loss is defined at entry, and defending them doesn’t often make sense.

Credit spreads, on the other hand, may require more active management. If the short leg moves in the money, you risk hitting max loss. In that case, you might:

• Roll out the spread (same strikes, later expiration) for more credit
• Roll down or up the strikes if the market has clearly shifted
• Close early if the loss approaches your predefined risk limit

Each vertical trade should be reviewed regularly. Staying passive works for some trades, but not all. Letting a credit spread go too far can be a costly mistake.