List of Financial Market Terms

A Vertical Spread is a commonly used Options strategy.  A Vertical Spread is created when a Trader simultaneously purchases and sells two of the same Options with the same expiration dates but different strike prices. It is exclusively used in options trading.

The beauty of a Vertical Spread is that it allows you take take advantage of an upside or downside move with less capital risk than with outright buying a call or put.  The cost is reduced because of the option you sell against the option you buy. The downside is that your gains are capped.

For Example; A Trader is bullish on WYNN.  The stock is trading at $90/share, and they believe it is going higher. 

Option 1: Buy the 90 Call @ 4.00 (debit). This requires a $400 initial investment per contract.  Max gain is theoretically unlimited. Max loss is 400.

Option 2: Buy the 90/95 Bullish Vertical @ 2.05. This consists of Buying the 90 Call @ 4.00 (debit), then selling the 95 Call @ 1.95 (credit) resulting in a net debit of 2.05. This requires a $205 initial investment per contract.  Max gain is the difference between the strike spread, which is 5 in this case (95-90), and the spread debit (2.05).  In this case, max gain is $295 per spread.  Max loss is $205. 

As you can see in the example above, this strategy can be advantageous from a capital preservation perspective. 

There are bullish Verticals and bearish Verticals.  Below are the different options available to Traders...

Bullish: Buy a Vertical Call Spread, Sell a Vertical Put Spread.

Bearish: Buy a Vertical Put Spread, Sell a Vertical Call Spread.

 

Related terms: Iron Condor, Calendar Spread, Extrinsic Value, Implied Volatility, CBOE, The Greeks, What is an Option?, Rho

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