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Summary

A vertical spread pairs a long and a short option of the same type and expiration at different strikes, capping both risk and reward while shedding roughly 90%+ of the outright option's theta and vega drag2. It is the building block of most multi-leg premium structures — iron condors, butterflies, and kites are all combinations of verticals1. The four canonical forms express the same directional view in debit or credit packaging, which are synthetically equivalent via put-call parity3.

Construction

Form Legs Net Directional tilt Theta
Bull call spread Long lower call, short higher call Debit Long delta Negative
Bear put spread Long higher put, short lower put Debit Short delta Negative
Bull put spread (credit) Short lower put, long lower wing Credit Long delta Positive
Bear call spread (credit) Short higher call, long higher wing Credit Short delta Positive

By parity, the bull call and bull put at the same strikes have nearly identical P&L shapes; the choice is about cash flow (pay now vs. collect now), financing, and whether theta works for or against the position3. TOMIC's income focus uses the credit forms — bull put and bear call — when IV is rich relative to HV and stable or falling1.

Payoff Table

Credit spread example — short 95 put / long 90 put for 1.00 credit on a 100 stock:

Price at expiry P&L
≥ 95 (short strike) +1.00 (max profit)
94 +0.00 (breakeven = short strike − credit)
≤ 90 (long strike) −4.00 (max loss = width − credit)

Debit spreads mirror this with direction-dependent breakevens: a bull call debit spread breaks even at long call strike + debit; a bear put debit spread breaks even at long put strike − debit. In both cases max profit is at/above the short strike side, max loss = debit.2

Greeks Profile

Greek Credit (short-delta put / long-delta put form) Debit
Delta Tilted toward forecast direction, smaller than outright Same, opposite sign of financing
Gamma Short near the short strike (hurts on big moves) Long near the long strike
Theta Positive — decay is the thesis Negative — you pay for time
Vega Typically negative OTM credit spreads Typically positive

Best Regime / Market View

  • Directional opinion plus IV > HV, stable or falling volatility, 30–60 DTE for income versions1.
  • Choose OTM vs. ITM short strike to tune probability vs. credit size; the stock must reach the short strike for a held-to-expiration debit payoff2.
  • Debit forms fit "vol-neutral directional" forecasts; credit forms fit "vol-rich, gently drifting" forecasts.

Primary Risks

  • Capped reward, real loss: max loss is the spread width (minus credit), and loss accrues fastest as price pins the short strike3.
  • Early assignment on short ITM legs near dividends.
  • Liquidity: four-leg-capable strikes only; wide markets can eat the edge.

Management Levers

  • Profit target: TOMIC takes credit spreads off at ~60–70% of the credit received1.
  • Close at a defined loss fraction of width; roll (up/down/out) only when the directional thesis is intact.
  • Size by width, not by credit: risk = width × 100 − credit.

Variants

  • Narrow vs. wide: narrow spreads behave more like the outright option (more delta/vega per dollar of width); wide spreads behave more like a short outright with a far tail.
  • At-the-money vs. OTM shorts for probability tuning.
  • Boxed verticals (a call spread + put spread at the same strikes) isolate financing and are conversion/reversal cousins2.

Links

Source Notes

  1. TOMIC strategy cheat sheet and vertical-spread conditions, ../option-traders-hedge-fund-bundle/topics/strategies.md. ↩↩↩↩

  2. Trading Option Greeks, spreads family overview, ../trading-option-greeks/topics/spreads.md. ↩↩↩↩

  3. Natenberg on spread families and sensitivities, ../option-volatility-and-pricing-bundle/topics/spreads.md. ↩↩↩