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Two Types of Vertical Spreads

Filed Under Trading Articles 

There are two types of vertical spreads – the vertical call and put spread. Each one allows investors to do two things. They can buy it and long the vertical spread. They can also sell it and short the vertical spread. Investors often utilize these measures to take advantage of directional stock plays, which capitalize on anticipated stock movements.

Vertical Call Spreads

When an investor is confident that a stock is likely to go up, they will employ a bull spread. It can be set up in two ways. The first is through calls. In this case, a bullish investor would buy a vertical call spread (bull call spread) by purchasing a call with a lower strike price and selling a call with a higher strike price.

Vertical Put Spreads

The second way to construct a bull spread is through puts. A bullish investor can sell a vertical put spread (bull put spread) hoping to profit from an increase in the stock’s value. The investor would sell a put with a higher strike price and buy a put with a lower strike price.

Look at the P&L chart of a Bull Spread below.

If an investor feels that a stock may be increasing in value, they might put on a bull spread by either buying a vertical call spread (bull call spread) or selling a vertical put spread (bull put spread).

Bear Spreads

On the other hand, when an investor feels that a stock is likely to trade down, they will employ a bear spread. The term “bearish” refers to a negative outlook on a stock’s future movement. To take advantage of this expected downward movement, an investor can put on a bear spread in two ways.

The investor can purchase a vertical put spread (bear put spread) by purchasing a put with a higher priced strike and selling a put with a lower priced strike. The investor can also construct a bear spread by selling a vertical call spread (bear call spread) by selling a call with a lower strike price and purchasing a call with a higher strike price.

Look at the P&L diagram for a Bear Spread below.

Two fundamentals are universal to all vertical spreads. You can determine a vertical spread’s maximum value by taking note of the difference between the two strikes and vertical spreads have intrinsic value.

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