Vertical Spread
An option vertical spread is the sale of one option and the purchase of another nearby option together as one ’spread’.
It is termed ‘vertical spread’ because if you were to look at an option chain that listed the all the available options – as well as the option sold and the option bought – these are usually listed vertically – one on top of the other. When you visualize the the sold option and the purchased option in that vertically listed option chain – visually they appear together as a ‘vertical spread’.
Both option debit spreads and credit spreads could be referred to as a vertical spread.
A debit spread is a spread that withdraws a debit from the traders account – while a credit spread is one that delivers a credit into the account.
Following are a couple provided examples of both a debit spread and a credit spread on the ETF DIA…
Debit Spread (vertical spread)
Buy 3 100 Calls
Sell 3 101 Calls
This is a bullish trade – a trader making this trade either is confident or is hoping that DIA will be heading higher.
Credit Spread (also a vertical spread)
Sell 3 105 Calls
Buy 3 106 Calls
This is a bearish trade (or neutral trade). A trader making this trade either believes or hopes that DIA will remain below the 105 price point up until expiration day.
photo credit: Patrick Hoesly
