The Complete Guide to Option Strategies: Advanced and Basic Strategies on Stocks, ETFs, Indexes, and Stock Indexes

CHAPTER 11

Vertical Spread

A vertical spread can be considered the bread-and-butter strategy of many experienced traders because it limits risk and is relatively straightforward. A vertical spread consists of the simultaneous purchase and sale of options with the same expiration date but different strike prices. Unless otherwise stated, this book assumes that, in a vertical spread, the number of options bought is equal to the number of options sold and that all options have the same expiration month. A vertical spread consists of all calls or all puts. One advantage of a vertical spread is its relative simplicity. A vertical spread is probably the most basic spread strategy and forms the foundation for learning other spread strategies.

In this chapter, we will describe a vertical spread from the perspective of buying versus selling, bullish versus bearish strategies, margin, pricing, and risk. In later chapters, we will explore more complex spreads, such as option strategies in which the legs of the spread expire at different times, strike prices are different, and/or the number of options sold differs from the number of options bought.

OVERVIEW

Instead of purchasing or selling an option outright, many traders prefer to limit risk by establishing a vertical spread. A vertical spread consists of options with the same expiration date but different strike prices. Each option is assumed to be in the same class (same expiration date, same underlying stock, and same type, meaning ...