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Core Concept: Buy and sell options at different strikes (same expiration) to reduce cost and define risk on both sides.
Why It Matters
Spreads are more capital-efficient than single options, with capped risk and reward. Core strategy for consistent income and directional bets.
When to Use
✅ Use vertical spreads when:
- Want directional exposure with less capital
- Defined risk on both sides
- IV rank >50% (sell expensive, buy cheaper)
- High probability trades (70-80% win rate)
❌ Avoid when:
- Expecting huge move (unlimited upside better)
- IV rank < 25% (poor risk/reward)
- Liquidity poor (wide spreads)
Spread Types
Bull call spread: Buy lower strike call, sell higher strike call (debit)
Bear put spread: Buy higher strike put, sell lower strike put (debit)
Bull put spread: Sell higher strike put, buy lower strike put (credit)
Bear call spread: Sell lower strike call, buy higher strike call (credit)
Debit spreads: Pay to enter, profit from directional move
Credit spreads: Collect to enter, profit from theta + no move against you
Trade-offs
Pros: Lower cost, defined risk, better win rate than naked options
Cons: Capped profit, requires two trades (commissions), less liquid
Vertical spreads combine long_call and long_put with short options to reduce cost and capture options_greeks theta.
Quick Reference
Credit spread setup (most popular):
| Metric | Bull Put Spread | Bear Call Spread |
|---|---|---|
| Bias | Bullish/neutral | Bearish/neutral |
| Sell strike | Below current price | Above current price |
| Width | $5-10 typical | $5-10 typical |
| Credit | 20-33% of width | 20-33% of width |
| Max profit | Credit collected | Credit collected |
| Max loss | Width - credit | Width - credit |
| Win rate | 60-80% | 60-80% |
Strike selection formula:
- Sell at 0.30-0.40 delta (70% OTM probability)
- Buy 5-10 strikes further OTM (protection)
- Target credit: 1/3 of spread width
Position sizing: Risk 1-2% of account per trade
Example: $50k account → Max $500-1,000 risk per spread
Examples
Bull put spread (credit spread):
Stock: $105 (bullish outlook)
Sell: 100 Put for $2.50 (0.35 delta)
Buy: 95 Put for $1.00 (protection)
Net credit: $1.50 ($150 per spread)
Width: $5 ($500)
Max profit: $150 (if stock stays above $100)
Max loss: $350 ($500 - $150)
Breakeven: $98.50 ($100 - $1.50)
Risk/reward: 2.3:1 (need 70% win rate)
Outcome 1: Stock at $105+ at expiration
- Both options expire worthless
- Keep $150 (30% return on $350 risk)
Outcome 2: Stock at $97 (below breakeven)
- Max loss: $350
- Put spread executed: Forced to buy at $100, sell at $95
Bear call spread (credit spread):
Stock: $100 (bearish outlook)
Sell: 105 Call for $2.00
Buy: 110 Call for $0.75
Net credit: $1.25 ($125)
Width: $5
Max profit: $125 (stock below $105)
Max loss: $375 ($500 - $125)
Breakeven: $106.25
Outcome: Stock stays at $100
- Keep $125 (33% ROI in 45 days)
Bull call spread vs long call:
Bullish on stock at $100, 45 DTE
Option A: Buy 100 Call for $5.00
- Cost: $500
- Max profit: Unlimited
- Max loss: $500
- Breakeven: $105
Option B: Buy 100 Call ($5), Sell 110 Call ($2)
- Cost: $300 (40% cheaper)
- Max profit: $700 (at $110+)
- Max loss: $300 (40% less risk)
- Breakeven: $103 (better)
Trade-off: Capped at 233% gain vs unlimited, but better risk/reward.
Managing winners:
Entry: Bull put spread, 45 DTE, $150 credit
Day 30: Captured 50% profit ($75)
- Option 1: Close early (take $75, free up capital)
- Option 2: Hold for full $150 (risk reversal)
Rule: Close at 50% profit to reduce risk and redeploy capital.
Managing losers:
Entry: Bear call spread, max loss $350
Position down $175 (50% max loss):
- Option 1: Close and take loss (avoid max loss)
- Option 2: Roll up and out (extend time, higher strikes)
Rolling: Sell 105/110 at loss, buy 110/115 spread for same or small credit
Adjusting for earnings:
Stock at $100, earnings in 2 weeks:
Before earnings: IV 80%, 100/95 put spread collecting $2.00
After earnings: IV drops to 40%, spread worth $0.50
Close early: $150 profit (75% max) in 2 weeks vs 45 days
High IV events = faster profits from volatility crush. ```
References
- Options Playbook: Vertical Spreads
- "Option Spread Strategies" by Anthony Saliba
- tastytrade vertical spread guides