What Is an Options Spread?
An options spread uses two or more options on the same underlying to shape risk and reward. By buying one leg and selling another, you can cap potential loss, cap potential profit, reduce cost, or earn a premium with defined risk. Spreads are commonly built as verticals, calendars, or diagonals, and expressed as bull or bear views using debit or credit structures.
Core spread types
- Vertical spread: Same expiry, different strikes. Examples include bull call, bear put, bear call, and bull put.
- Calendar (horizontal) spread: Same strike, different expiries. Typically buys longer-dated and sells nearer-dated to benefit from time decay on the short leg.
- Diagonal spread: Different strikes and different expiries. Combines a directional view with a time-decay component.
Bull vs bear spreads
Bull spreads
- Bull call spread (debit): Buy lower strike call, sell higher strike call, same expiry.
- Bull put spread (credit): Sell higher strike put, buy lower strike put, same expiry.
Bear spreads
- Bear put spread (debit): Buy a higher strike put, sell a lower strike put, same expiry.
- Bear call spread (credit): Sell lower strike call, buy higher strike call, same expiry.
Debit vs credit spreads
- Debit spread: You pay a net premium up front. Risk is the net premium paid. The reward is limited. Works best when you expect the price to move in your favour. Examples: bull call, bear put.
- Credit spread: You receive a net premium up front. Maximum profit is the premium received. Risk is limited to the strike difference minus the premium received. Works best when you expect the price to stay within a range or move only moderately. Examples: bull put, bear call.
Payoff basics for common verticals
How to choose a spread?
- View strength: Moderate up or down views favour vertical spreads.
- Cash flow preference: Use debit for limited cost and defined risk. Use credit for income with defined risk.
- Time element: To benefit from near-term time decay, consider calendar or diagonal structures.
- Risk limits: Check maximum loss against available capital and margin.
Match the spread to your view and risk cap, use debit for directional conviction and credit for range or modest moves, and always confirm expiry and margin rules before placing orders.
What If...
| Scenario | Outcome |
|---|
| Market runs through both strikes in a vertical spread | You reach maximum profit or maximum loss. Risk and reward remain defined. |
| Calendar spread held into the expiry of the short leg | Short leg expires first. Time decay helps near the strike, but margin treatment can change near expiry. |
| Diagonal spread with stagnant price | Time decay on the short leg may generate profit if the long leg retains value. |
| Credit spread and price moves beyond breakeven | Loss is limited to the strike difference minus the premium received. |
| Debit spread and price do not move enough | Time decay can erode the position, and you may lose part or all of the net premium paid. |
Last updated: 04 Nov 2025
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