Let's talk about vertical spreads, a common type of option strategy where an investor buys one option and sells another on the same underlying asset with the same expiration dates, but with different strike prices.

The key feature of a vertical spread is that both options are either calls or puts, and their difference lies only in the strike price.

The name vertical spread comes from the way these trades are typically displayed in an options pricing table where different strike prices are listed in a vertical column.

Since the only distinction between the two options in this strategy is the strike price.

It is referred to as a vertical spread.

This is different from horizontal spreads, sometimes called calendar spreads, which involve buying and selling options with the same strike, but different expiration dates.

In that case, the difference between the two options is time rather than price.

Now let's break down the four types of vertical spreads.

These are categorized based on whether they use calls or puts, and whether they are structured for a bullish or bearish market view.

A bull call spread involves buying a call option and selling another call option with a higher strike price.

Because the purchased call has a higher premium than the one sold, this results in a net premium outlay making it a debit spread.

Just like a debit in an account, it means money flows out.

The goal here is to profit from an increase in the underlying assets price, while limiting both risk and reward.

The maximum loss is the initial premium paid while the maximum profit is capped at the difference between the two strike prices minus the premium paid.

A bull put spread takes a different approach, but also expresses a bullish view.

Here the investor sells a put option and simultaneously buys another put option with a lower strike price.

This structure results in a net premium income, making it a credit spread.

Just like a credit in an account, means money flows in a short put generates premium income, while the long put serves as a hedge limiting potential losses.

The strategy benefits from a stable or rising price with maximum profits equal to the net premium received and maximum loss capped at the difference between the strike prices minus The premium received.

Now let's look at bearish vertical spreads.

A bear call spread involves selling a call option while buying another call with a higher strike price.

This strategy generates a net premium income, making it a credit spread.

It benefits from a decline or stagnation in the underlying assets price as the sold calls premium is greater than the purchased calls cost.

The maximum gain is the net premium collected while the maximum loss is capped at the difference between the two strike prices minus the premium received.

Lastly, a bare put spread consists of buying a put option while selling another put with a lower strike price like the bull call spread.

This results in a net premium outlay, making it a debit spread.

The goal here is to benefit from a decline in the underlying assets price while managing costs through the premium received from the short put.

The maximum loss is the net premium paid while the maximum profit is capped at the difference between the two strike prices minus the premium paid.

Vertical spreads are widely used by traders because they provide defined risk and reward while reducing the overall cost of taking up position position.

So instead of paying the full premium for a single long option, a debit spread offsets part of that cost by selling another option at a different strike, making it more capital efficient.

Similarly, credit spreads allow traders to collect premium income upfront while limiting potential losses.