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Vertical debit spreads

Cheaper, defined-risk directional trades.

11 min · Beginner

What you'll learn

• Build a bull call spread and a bear put spread from two legs
• Calculate max profit, max loss and breakeven for a debit spread
• Explain why spreads reach full value mostly near expiration and how to manage the short leg

Key takeaways

• A debit spread buys one option and sells a farther-OTM option of the same type and expiration.
• Max loss is the debit; max profit is width minus debit; breakeven is long strike plus or minus the debit.
• Spreads cost less and lower the breakeven, but cap profit at the short strike.
• Spreads often reach full value only near expiration, so many traders take profit at 50% to 75% of max.
• Close spreads before expiration to avoid assignment and pin risk.

Glossary

• Vertical spread — Buying and selling options of the same type and expiration at different strikes.
• Debit — The net amount paid to open a spread; for a debit spread it is also the maximum loss.
• Spread width — The difference between the two strike prices in a vertical spread.
• Pin risk — Uncertainty about assignment when the stock closes near a short strike at expiration.

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