Vertical debit spreads
Lesson 20 · about 10 min
A vertical spread is two options of the same type and expiration at different strikes, one bought and one sold. It is the first structure most traders should learn after single options, because it fixes the two biggest problems with buying outright: the theta bill and the vega exposure. The price is a capped profit.
The bull call spread
XYZ at $50, 45 days to expiration. Buy the $50 call at $2.40, sell the $55 call at $0.70.
- Net debit: $2.40 − $0.70 = $1.70 per share, $170 per contract. This is the maximum loss.
- Maximum profit: width of the strikes minus the debit = ($55 − $50) − $1.70 = $3.30 per share, $330 per contract.
- Breakeven at expiration: lower strike plus debit = $50 + $1.70 = $51.70.
- Reward to risk: $330 ÷ $170 = 1.94 to 1.
The full P&L table at expiration:
| XYZ at expiry | $50 call value | $55 call value | Spread value | P&L per share | P&L per contract |
|---|---|---|---|---|---|
| 46 | 0.00 | 0.00 | 0.00 | −1.70 | −$170 |
| 50 | 0.00 | 0.00 | 0.00 | −1.70 | −$170 |
| 51.70 | 1.70 | 0.00 | 1.70 | 0.00 | $0 |
| 53 | 3.00 | 0.00 | 3.00 | +1.30 | +$130 |
| 55 | 5.00 | 0.00 | 5.00 | +3.30 | +$330 |
| 58 | 8.00 | 3.00 | 5.00 | +3.30 | +$330 |
| 65 | 15.00 | 10.00 | 5.00 | +3.30 | +$330 |
Bull call spread 50/55 for 1.70
P&L
+330 | _____________________
| /
0 |-----------------X------------------------ X = 51.70
| /
-170 |_______________/
+----+----+----+----+----+----+----+----
46 48 50 52 54 56 58 60 XYZ at expiry
Above $55 the spread is worth exactly $5 no matter how far XYZ runs. Below $50 it is worth zero. Between them it is worth XYZ minus $50.
Compared with the outright call
Same view, same expiry, three ways to express it:
| Structure | Cost | Max loss | Breakeven | P&L at $53 | P&L at $55 | P&L at $60 |
|---|---|---|---|---|---|---|
| Long $50 call | 2.40 | 2.40 | 52.40 | +0.60 | +2.60 | +7.60 |
| Bull call spread 50/55 | 1.70 | 1.70 | 51.70 | +1.30 | +3.30 | +3.30 |
| Bull call spread 50/52.50 | 1.15 | 1.15 | 51.15 | +1.35 | +1.35 | +1.35 |
At $53, a 6% rally, the spread makes more than the call, because the sold $55 call reduced the cost. At $60, a 20% rally, the call makes more than twice what the spread does. The spread gives up the big win to make the moderate win more likely and cheaper.
The narrower 50/52.50 spread costs less and breaks even sooner, but caps at $1.35. Width is a dial: narrower is cheaper with a lower cap; wider costs more and pays more.
The Greeks of a debit spread
Because you are long one option and short another, the Greeks partly cancel:
| Greek | Long $50 call | Short $55 call | Spread net |
|---|---|---|---|
| Delta | +0.53 | −0.25 | +0.28 |
| Gamma | +0.070 | −0.055 | +0.015 |
| Theta | −0.027 | +0.018 | −0.009 |
| Vega | +0.070 | −0.055 | +0.015 |
The spread's theta is a third of the call's, and its vega is a fifth. The "too slow" and "volatility fell" losses from Module 5 are much smaller. What you lose is delta: the spread moves at 0.28 per dollar rather than 0.53, so a fast rally pays less.
Note that the theta sign flips as the stock moves. If XYZ rallies to $55, the short $55 call becomes the ATM option with the biggest theta, and the spread's net theta turns positive: time now works for you. Debit spreads bought ATM and held into a rally become theta-positive positions, which is one reason to hold them longer than a single option.
The bear put spread
The mirror for a bearish view. XYZ at $50: buy the $50 put at $2.30, sell the $45 put at $0.65.
- Net debit: $1.65. Max loss $165.
- Max profit: $5 − $1.65 = $3.35, or $335, reached at or below $45.
- Breakeven: $50 − $1.65 = $48.35.
| XYZ at expiry | Spread value | P&L per contract |
|---|---|---|
| 55 | 0.00 | −$165 |
| 50 | 0.00 | −$165 |
| 48.35 | 1.65 | $0 |
| 46 | 4.00 | +$235 |
| 45 and below | 5.00 | +$335 |
Because of skew (Module 4) the $45 put you sell carries higher IV than the $50 put you buy, which makes bear put spreads a little cheaper relative to their width than bull call spreads. The effect is small but consistent.
Key idea: A vertical debit spread buys an option and sells a further-out one against it. Max loss is the debit, max profit is width minus debit, breakeven is the long strike plus (calls) or minus (puts) the debit. Theta and vega drop sharply; so does the upside.
When a debit spread fits
- You have a directional view with a target price. Set the short strike at or just past the target; you were not planning to profit beyond it anyway.
- IV is high for the stock. The spread sells back part of the expensive volatility.
- The expected move is moderate (3% to 10%) rather than explosive.
- You want to hold longer without the theta bill; a spread survives a slow move much better than a single option.
When it does not fit: when your view is for a very large move, or when the stock is so illiquid that two bid-ask spreads eat the edge. Check the options profit calculator to see the P&L across prices and dates before entering; the shape changes considerably before expiration.
Try it: Take a stock you would buy a call on. Build the bull call spread with the short strike at your target. Compute the debit, max profit, breakeven and reward-to-risk. Then compute the P&L of both the spread and the outright call at three prices: halfway to target, at target, and 50% beyond. Decide which structure matches what you actually expect.
Recap
- Bull call spread: buy a lower-strike call, sell a higher-strike call; bear put spread: buy a higher-strike put, sell a lower-strike put.
- Max loss = debit; max profit = width − debit; breakeven = long strike ± debit.
- Debit spreads cut theta and vega to a fraction of the single option's, at the cost of capped profit and lower delta.
- Net theta turns positive if the stock reaches the short strike, so spreads can be held longer.
- Best fit: a directional view with a target, moderate expected move, elevated IV.