What you will learn
- Explain what a vertical spread is
- Construct a bull call spread
- Compute its net debit, max profit, max loss, and breakeven
- Understand the defined-risk trade-off
The covered call and protective put each pair one option with stock. Spreads go further, combining two options to build positions with carefully defined risk and reward. The vertical spread is the most basic one, and it teaches a principle that runs through all of options strategy: you can trade away some potential profit in exchange for lower cost and clearly bounded risk.
Bull call spread tutorial (projectoption)
Builds the bull call spread step by step. Follow the payoff and the capped profit and loss.
What a spread is
A spread simultaneously buys one option and sells another of the same type, both calls or both puts, on the same underlying. A vertical spread uses the same expiration but different strikes. The sold option offsets part of the cost of the bought option, and the combination has both a capped maximum profit and a capped maximum loss. The name vertical refers to the two strikes sitting at different levels on an options price table.
The bull call spread
A common example is the bull call spread, a moderately bullish position. You buy a call at a lower strike and sell a call at a higher strike, same expiration. The bought call gives upside, while the sold call reduces your cost. The trade-off is that the sold call caps your profit: once the stock rises above the higher strike, gains on your bought call are offset by losses on your sold call, so you no longer benefit. You reduced your cost in exchange for capping your upside.
Key terms
- Vertical spread
- Buying and selling two options of the same type and expiration but different strikes.
- Net debit
- The net cost of a spread: the premium paid minus the premium collected.
- Strike width
- The difference between the two strikes, which caps the spread's total value.
- long premium = premium paid for the bought call
- short premium = premium collected on the sold call
- strike width = higher strike − lower strike
- net debit = net cost of the spread
- net debit = net cost of the spread
- lower strike = the bought call's strike
A bull call spread's numbers
You buy a 50 call for 4 dollars and sell a 55 call for 2 dollars, same expiration. Find the net debit, max profit, max loss, and breakeven.
- Net debit. Long premium minus short premium is 4 − 2, which is 2 dollars.
- Max profit. Strike width minus net debit is (55 − 50) − 2, which is 5 − 2, or 3 dollars.
- Max loss and breakeven. Max loss is the 2 dollar net debit, breakeven is 50 + 2, which is 52 dollars.
Why it matters: For a 2 dollar cost you can make at most 3 and lose at most 2, a clean defined-risk trade. Both ends are capped, which is the whole point of a spread.
Bull call spread max profit
You buy a 100 call for 6 dollars and sell a 110 call for 2 dollars. What is the maximum profit per share, in dollars?
The bear put spread and credit spreads
- A bear put spread is the bearish counterpart: buy a put at a higher strike and sell a put at a lower strike, profiting if the stock falls, with both profit and loss capped.
- Spreads can also be built for a net credit up front rather than a net cost, such as a bull put spread or a bear call spread, where the premium collected exceeds the premium paid, and the trader profits if the options expire favorably while still enjoying defined risk.
A spread trades away part of your profit for a lower cost and a known worst case. You give up the home run to define exactly what you can lose.
Bull call spread trade examples (projectoption)
Works through real trade examples of the spread. Reinforces the defined-risk numbers.
The defining benefit and the trade-off
The main advantage of vertical spreads is that they cap both the maximum profit and the maximum loss, creating a defined-risk position. Compared with buying a single option outright, a spread costs less, because the sold option offsets part of the premium, and it has a known, bounded worst case. This connects directly to the risk-management philosophy of Unit 6: knowing your maximum possible loss before you enter, and ensuring it is survivable, is a cornerstone of disciplined trading. Nothing comes free, though: the price of that defined risk and lower cost is the capped profit. You give up the unlimited upside of a single long option in exchange for a cheaper, bounded position. Options strategy is about shaping the payoff to match your view and risk tolerance, sacrificing in one dimension to gain in another.
Why cap the upside?
A trader is moderately bullish and chooses a bull call spread instead of just buying a call. What is the main reason?
A bull call spread costs less than an outright call and has a defined maximum loss, which fits a moderately bullish view. The trade-off is a capped profit, since the trader does not expect a huge move and prefers cost efficiency and bounded risk.Shaping the payoff
In your own words, explain how a vertical spread reshapes the payoff of a single option and what a trader gives up and gains.
Write an answer before comparing it with the model response.
Model answer
A single long call costs the full premium and has unlimited upside, but the whole premium is at risk. A vertical spread adds a sold option at a different strike, and the premium collected on that sold leg lowers the net cost and reduces the maximum loss to that smaller net debit. In exchange, the sold leg caps the profit, because beyond the higher strike the gains on the bought call are offset by losses on the sold call. So the trader gives up the small chance of an enormous gain and gains a cheaper position with a clearly defined, survivable worst case. It is a deliberate reshaping of the payoff to fit a moderate directional view and a preference for defined risk over a home run.
Every strategy so far bets on direction. The next lesson introduces positions that bet on the size of a move instead: straddles and strangles.