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