Buying a single Call or Put has a problem: Theta drains value every day. Vertical spreads solve it, taking a directional position at lower cost and with a fully defined risk.
Bull Call Spread
Buy a Call at a lower Strike Price + sell a Call at a higher one. It lowers the entry cost and caps the profit in return.
Bull spread on NVDA ($875)| Buy a 880 Call (45 days) | Pay $22.50 |
| Sell a 920 Call (45 days) | Collect $8.50 |
| Net debit (cost) | $14.00 = $1,400 |
| Max profit | (920−880−14)×100 = $2,600 |
| Breakeven | 880 + 14 = $894 (only ~2.2% rise) |
* This is a hypothetical illustration and does not reflect actual results. Results vary with market conditions and execution timing.
Bear Put Spread
Bear spread on SPY ($510)| Buy a 505 Put (30 days) | Pay $6.80 |
| Sell a 490 Put (30 days) | Collect $3.20 |
| Net debit | $3.60 = $360 |
| Max profit | (505−490−3.60)×100 = $1,140 |
| Breakeven | 505 − 3.60 = $501.40 |
* This is a hypothetical illustration and does not reflect actual results. Results vary with market conditions and execution timing.
| Position | The right spread | Why |
|---|---|---|
| Moderate bullish outlook | Bull spread | Costs less than buying a single Long Call |
| Bearish outlook + high IV | Bear spread | Selling lowers the cost of buying |
| Very strong bullish outlook | Long Call | The spread caps big gains |
| Sideways market | Iron Condor | Use time and range together |
* This is a hypothetical illustration and does not reflect actual results. Results vary with market conditions and execution timing.
