Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management

Chapter 15. The Vertical Spread and Volatility

A vertical spread is a popular options investment strategy for the investor who wants to hedge his bets about how a given asset will perform over time. The vertical spread involves buying either a call or a put option contract and at the same time writing another call or put contract with the same expiration date but at a different strike price.

A vertical spread is dubbed a bull spread if the trader expects the price of the underlying asset to go up. In a bull spread with calls, the trader buys a call contract with one strike price and sells a call contract with the same expiration date but a higher strike price. In the case of puts, the trader sells a put contract with one strike price and buys another put contract with the same expiration date but a lower strike price.

A vertical spread is referred to as a bear spread if the trader expects the price of the underlying asset to drop. In a bear spread with calls, the trader sells a call contract with one strike price and buys a call contract with the same expiration date but a higher strike price. A bear spread with puts involves buying a put contract with one strike price and selling another put contract with the same expiration date but a lower strike price.

To confuse matters more, a vertical spread (aka bull or bear spread) is also referred to as a debit or credit spread and is named according to whether the spread involves an initial inflow (credit) or outflow (debit) of cash. If ...