Options Trading Lessons: Vertical Spreads

There are two main types of vertical spreads.


There is the vertical call spread and the vertical put spread.


Each spread allows you to do two things.


First, you can buy it, making you long the vertical spread.



Second, you can sell it making you short the vertical spread.



Both can be employed to take advantage of directional stock plays.


When we use the term 'directional stock play,' we refer to using vertical spreads to capitalize on anticipated stock movements either up or down.


A bull spread is used when the investor feels that a stock is most likely to go up.


As we recall, 'bullish' means to have a positive outlook on a stock's future movement.


There are two ways to set up a bull spread.


The first is with the use of calls.


In this case, a bullish investor would buy a vertical call spread (bull call spread).


This is accomplished by buying a call with a lower strike price and selling a call with a higher strike price.


The second way to construct a bull spread is with the use of puts.


A bullish investor could sell a vertical put spread (bull put spread) hoping to profit from an increase in the stock's value.


The investor would sell a put with a higher strike price and buy a put with a lower strike price.