What is a Vertical Spread Strategy?

A vertical strategy, also known as a vertical spread, involves buying and selling options on the same underlying security with the same type (calls or puts) and expiration date but at different strike prices.

Long Call Vertical

This strategy is used when you expect the price of the underlying security to rise.

• Buying a call option with a lower strike price (long call).
• Selling a call option with a higher strike price (short call).
• Both options have the same expiration date.
• This strategy allows you to buy the stock at the lower strike price and sell it at the higher strike price, while receiving a premium for selling the higher strike call.

Long Put Vertical

This strategy is used when you expect the price of the underlying security to fall.

• Buying a put option with a higher strike price (long put).
• Selling a put option with a lower strike price (short put).
• Both options have the same expiration date.
• This strategy allows you to sell the stock at the higher strike price and receive a premium for agreeing to buy the stock at the lower strike price.

Short Call Vertical

This strategy is used when you expect the price of the underlying security to stay the same or decrease.

• Selling a call option with a lower strike price (short call).
• Buying a call option with a higher strike price (long call).
• Both options have the same expiration date.
• You receive a premium for selling the lower strike call and have the right to buy the stock at the higher strike price to limit potential losses if the stock price rises.

Short Put Vertical

This strategy is used when you expect the price of the underlying security to stay the same or increase.

• Selling a put option with a higher strike price (short put).
• Buying a put option with a lower strike price (long put).
• Both options have the same expiration date.
• You receive a premium for selling the higher strike put and have the right to sell the stock at the lower strike price to limit potential losses if the stock price falls.

Option trading entails significant risk and is not appropriate for all investors. Option investors can rapidly lose the entire value of their investment in a short period of time and incur permanent loss by expiration date. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options before trading options.