Vertical spread.

In plain English

A vertical spread pairs a long option and a short option of the same class and date, differing only in strike price. The name comes from option chains, where strikes run down a column and dates run across, so a trade using one date and two strikes moves vertically. Bull call spreads, bear put spreads, and the two halves of an iron condor are all vertical spreads. Because one leg offsets the other, both the maximum gain and the maximum loss are fixed and can be calculated before the trade is placed. The width between the strikes sets the size of that range.

01Why it matters

Knowing a trade is vertical tells the reader the loss is capped by design, which is a different exposure than a naked short option, where losses are open-ended.

02The math, step by step

Two strikes 5 points apart make a 5 point wide spread, so the most the position can ever be worth is 500 for one 100 share contract. Pay 2 (200) for it and the best case is 300 while the worst case is the 200. Collect 2 for it instead and the best case is 200 while the worst case is 300.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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