Beginner Strategies: Vertical Spreads (Defined Risk)
Vertical spreads combine a long option and a short option at different strikes. They lower cost or reduce risk compared to buying or selling a single option outright.
Before You Trade
These examples and charts are simplified teaching models. Confirm live pricing, liquidity, and assignment risk in your broker before placing real trades.
Debit vs Credit
Two flavors, one simple idea
Debit spreads cost money to enter and profit from directional moves (e.g., bull call spread). Credit spreads pay you up front and profit if the stock stays on one side of your short strike (e.g., bull put spread).
Bull call debit spread: buy $100 call, sell $110 call, net debit = $3.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Bull put credit spread: sell $100 put, buy $95 put, net credit = $2.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Max Risk / Max Reward
Defined risk is the big advantage
Spreads have built-in risk limits. That makes sizing easier and prevents catastrophic losses. The tradeoff is capped upside.
Debit spread
Max risk = debit paid. Max reward = strike width - debit.
Credit spread
Max reward = credit received. Max risk = strike width - credit.
Breakeven
Debit: long strike + debit. Credit: short strike - credit (puts).
Think in probabilities
Spreads are great when you want a defined risk trade with a clear thesis. You can pick a strike that aligns with your probability of success instead of buying expensive, out-of-the-money options.
When to Use
Why not just buy a call or sell a put?
Single-leg options give more upside, but they’re also more expensive and more sensitive to volatility. Spreads help by lowering cost and reducing vega exposure.
Use a debit spread when…
- • You have a directional view but want lower cost.
- • Implied volatility is high and calls are expensive.
- • You want a defined max loss.
Use a credit spread when…
- • You have a neutral-to-directional view and want income.
- • You prefer high probability, defined risk trades.
- • You can accept capped profits.
Greeks In Action
Vega and theta behave differently by spread type
Debit spreads are long vega (they like rising volatility) and lose value from time decay. Credit spreads are short vega (they benefit when volatility falls) and gain from theta.
Rising IV helps debit spreads, but can hurt credit spreads.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Time decay hurts debit spreads but helps credit spreads.
Illustrative example only: chart values are simplified to teach mechanics and are not live quotes or trade forecasts.
Example Builds
Step-by-step spread checklist
Bull call debit spread
- 1. Pick a bullish target level.
- 2. Buy an in-the-money or at-the-money call.
- 3. Sell a call at your target to offset cost.
- 4. Confirm max risk (debit) and max reward (width - debit).
Bull put credit spread
- 1. Identify a support zone you think will hold.
- 2. Sell a put above support to collect premium.
- 3. Buy a lower strike put to cap risk.
- 4. Confirm max reward (credit) and max risk (width - credit).
Who This Is For
Beginners who understand single-leg options and want to learn how combining two options into a spread can define risk and reduce cost.
Learning Objectives
- • Explain the difference between a debit spread and a credit spread.
- • Calculate max risk, max reward, and breakeven for both spread types.
- • Identify when to use a debit spread vs. a credit spread based on market outlook.
- • Understand how vega and theta behave differently in debit vs. credit spreads.
Risk Note
While vertical spreads define your maximum loss, that loss can still be significant relative to the premium collected (for credit spreads) or paid (for debit spreads). Always size your position so the max loss is a small percentage of your account. Near expiration, short legs can be assigned if they finish ITM.
Example Walkthrough
Scenario — Bull call debit spread: XYZ is at $100. You buy the $100 call for $4.50 and sell the $110 call for $1.50. Net debit = $3.00 ($300 total).
Best case: XYZ above $110 at expiration
Spread is worth $10 (width). Profit = ($10 − $3) × 100 = +$700.
Worst case: XYZ below $100 at expiration
Both calls expire worthless. Max loss = debit paid = −$300.
Breakeven: $100 + $3 = $103. The stock must reach $103 for you to break even. Risk/reward ratio: Risk $300 to make $700 (about 1:2.3).
Common Mistakes
Choosing strikes too far apart
Wide spreads cost more (debit) or require more margin (credit). The wider the spread, the more you can lose if the trade goes against you.
Ignoring the risk/reward ratio
A credit spread that collects $0.50 on a $5-wide spread risks $4.50 to make $0.50. That is a 9:1 risk-to-reward ratio—not always worth it.
Holding too close to expiration
Assignment risk increases as the short leg goes ITM near expiration. Consider closing spreads before the last few days.
Not using limit orders for spreads
Always place combo orders with a limit price. Legging into spreads separately can leave you exposed if the stock moves between fills.
Quick Recap
- • Debit spreads pay to enter and profit from directional moves; max loss is the debit paid.
- • Credit spreads collect premium and profit when the stock stays on the right side of the short strike; max loss is width minus credit.
- • Both types define your max risk at entry, making position sizing straightforward.
Next lesson
Protective Puts (Hedging 101)
Up nextLearn how protective puts insure your stock, how much they cost, and when to use them.
ContinueKeep Going
Ready to apply this to your own trades?
Theta Tracker helps you log positions quickly, follow P&L, and review your decisions over time. Start with a free account and keep your process organized from day one.
Create your free account