We apply vertical spreads to complex market strategies. These tactics consist of basic trader options for increasing, decreasing, and managing sideways movement in-stock pricing. Here’s a beginner’s guide for what you need to know about vertical spreads.
Traders may buy an option and sell an option simultaneously. These options are in the same expiration date and type but will be of different strike prices. These spreads can be bearish or bullish.
Call Vertical. The buying and selling of call options with varying strike prices in identical expiration.
Put Vertical. Involves buying and selling put options of different strike pricing in the same expiration.
Four Types of Vertical Spreads
Bull Call Spread Strategy
Build a bullish vertical spread with call options. Other names for this device are buying call spreads, long call spreads, or call debit spreads. The bullish spread consists of buying a call and, at the same time, selling another call at higher strike pricing. Both the buy and sell have to fall under the same expiration date. The strategy entails a trader believes a stock price will go up, but not to a higher price than the strike price of a call that’s sold. This transaction makes money as the price increases.
Bear Call Spread Strategy
You construct bear call spread strategies with two calls in the same cycle of expiration. A bear call spread is also called call credit spread, the short call spread or referred to as selling a call spread. In this process, you bet against a stock price increase. You buy and sell call options at higher strike pricing with both options in the same expiration cycle. Bear spreads profit as the price drops or with a price below a breakeven price over the passage of time.
Bear Put Spread
The bear put spread strategy is deployed by traders when they believe a bearish stock price will drop. They buy a put option and sell another put at a lower strike price. They’re gambling on the price decreasing. The options have to fall in the same expiration cycle. The goal is understanding the price will fall, but not to a lower price than the short put’s strike price. Profits result from the value increase across the spread, all else being equal.
Bull Put Spread Strategy
Selling a put option and buying a put option at lower strike prices are bull put spreads. The strategy requires both options to be in the same expiration. This strategy is also called put credit spread and short put spread or selling a put spread. Traders engage in this strategy when it’s believed a stock price can trade sideways or have a moderate rise through a put spread’s expiration date. In general, traders use this strategy to profit from declines in stock pricing.
Trading a vertical spread is favorable from the risk/reward standpoint if losing trades are closing in on maximum loss. According to tastytrade, vertical spreads allow traders “to trade directionally while clearly defining our maximum profit and maximum loss on entry.”