A single long option works, but it’s pricey and bleeds theta. A vertical spread fixes both by adding a second, offsetting leg at a different strike — same type, same expiry.
The idea
You buy one option and sell another further out. The premium you collect on the short leg pays for part of the long leg. In return, you cap your maximum profit. It’s a trade-off: cheaper and defined, but with a ceiling.
Bull call spread (moderately bullish)
- Buy a call, sell a higher-strike call.
- Net debit (you pay).
- Max loss = the debit. Max profit = strike width − debit. Breakeven = lower strike + debit.
Cheaper than a lone long call, with a lower breakeven — you just give up the unlimited upside.
Bear put spread (moderately bearish)
- Buy a put, sell a lower-strike put.
- The mirror image: profits as the stock falls toward the lower strike, capped both ways.
Why traders love them
- Defined risk — you know your worst case the moment you open.
- Lower cost — the short leg subsidises the long leg.
- Less Greek noise — the legs partly cancel each other’s theta and vega, so you’re betting more cleanly on direction.
See it for yourself
Open the payoff playground and pick Bull Call Spread. Notice the flat ceiling above the short strike and the flat floor below the long strike — that boxed-in shape is defined risk. Drag the spread width and watch max profit and max loss trade off against each other.
Spreads are the workhorse of intermediate trading: most defined-risk strategies (including iron condors) are just spreads stacked together.