This document defines and explains various option spread strategies. A spread involves buying and selling options of the same class but with different strike prices and/or expiration dates. The goal is to limit risk and profit from changes in the price relationship between the legs. There are vertical spreads, where the options have the same expiration but different strikes, and calendar spreads, where the options have the same strike but different expirations. Spreads can be debit spreads, where a net premium is paid, or credit spreads, where a net premium is received. Example strategies discussed include bull call spreads, bear put spreads, bull put spreads, and bear call spreads.

1. Spreads-Directional Strategies -Concepts
• Why called Directional strategies?
• What is a spread?
• Horizontal/ Calendar spread.
• Vertical spread.
• Credit spread
• Debit spread
• Bull call spread
• Bear put spread
• Bull put spread
• Bear call spread

2. Spreads-Concepts
• What is a spread?- a strategy consisting of at
least two components (part or ‘leg’), transacted
simultaneously, (at the same time).
• The price relationship between each leg could
change due to a move in the price of the
underlying and/or volatility.
• It is entered into with the intention of either
limiting risk and/or profiting from the change in
price relationship between the legs.

3. Spreads-Concepts
• Calendar or Horizontal spread-the simultaneous
purchase and sale of options:
1. of the same class (call or put, having same
underlying)
2. at the same strike prices
3. but different expiration dates,
4. selling the shorter option and buying the longer
option.

4. Spreads-Concepts
• Vertical spread-the simultaneous purchase and
sale of options:
1. of the same class (call or put, having same
underlying)
2. at different strike prices
3. but same expiration dates.

5. Spreads-concepts
• Credit spread-a spread in which the difference in
the long and short option premiums results in a
net credit. –cash inflow. (greatest reward
potential on spread)
• Debit spread-a spread in which the difference in
the long and short option premiums results in a
net debit.-cash outflow (greatest risk of loss on
spread)
• The difference in premiums, cash inflow or
outflow is also referred to as initial investment.

6. Types of spreads
• Bull call spread-a spread that involves the purchase of a
lower strike call and the sale of a higher strike call. A debit
spread (why?) having a limited reward and limited risk
potential. (BUCA)
• Bear put spread-a spread that involves selling the lower
strike and buying the higher strike put. A debit spread with
limited reward and limited risk potential. (BEPU)
• Bull put spread-a credit spread that involves selling the
higher strike put and buying the lower strike put. A bullish
position with limited risk and profit potential. (BUPU)
• Bear call spread-a credit spread that involves selling
the lower strike call and buying a higher strike call. A
bearish position with limited risk and profit
potential. (BECA)

7. Credit Debit
Strategy Buy-low Buy-high Buy-low Buy-high
Sell-high Sell-low Sell-high Sell-low
Reward-Max.Profit NP NP K2-K1-NP K2-K1-NP
When Max Profit U >= K2 U <= K1 U >= K2 U <= K1
Risk-Max Loss K2-K1-NP K2-K1-NP NP NP
When Max loss U <= K1 U >= K2 U <= K1 U >= K2
Break Even K2-NP K1+NP K1+ NP K2-NP
When to use Bull Spreads-Moderately Bullish. Bear Spreads-Moderately Bearish
Underlying logic Debit Spread- Why spend too much on premiums when views are
anyway moderate and superprofits are not expected?
Credit Spread-What if our views on moderate movements do not
come true? Losses are unlimited.
Vertical
Spreads
Bull Put
Spread
Bear call
Spread
Bull Call
Spread
Bear Put
Spread

8. Maximum value of a vertical spread
• The maximum value of a vertical spread will
always be the difference between the strikes, (+)
the credit received or (-) the debit paid from a
spread to calculate the actual profit
Difference between strikes K2- K1
+C or-D
= Profit

9. Bull vs. Bear spreads
• Bulls hope to profit when stock price increases.
• Bears hope to profit when stock price decreases.

10. Bull Call Spread (debit).
• Strategy: Buy call (long) with a lower strike (ITM)
+ sell call (short) with a higher strike (OTM).
• When to use: Investor is moderately bullish.
• Risk: Limited to initial premium paid in
establishing the position. Maximum loss occurs
when the underlying <= lower strike.
• Reward: Limited to the difference between the
two strikes minus net premium costs. Maximum
profit, when underlying >= higher strike.
• Breakeven:Strike of long call + net debit paid.

11. Bull Call Spread
Bull Call Spread Long Call Short Call
K1/K2 150 155
Price LC Prft SC Prft Spread P1/P2 -3 2 -1.00
146 -3 2 -1
147 -3 2 -1
148 -3 2 -1
149 -3 2 -1
150 -3 2 -1
151 -2 2 0
152 -1 2 1
153 0 2 2
154 1 2 3
155 2 2 4
156 3 1 4
157 4 0 4
158 5 -1 4
159 6 -2 4
160 7 -3 4
Initial
Investment
-4
-2
0
2
4
6
8
146 147 148 149 150 151 152 153 154 155 156 157 158 159 160
Y-Profit
X-Price
LC Prft SC Prft Spread

12. Bear Put Spread(debit)
• Strategy : Buy put (long) with a higher strike (ITM)
+ sell put (short) with a lower strike (OTM).
• When to use: Investor is moderately bearish.
• Risk: Limited to the net amount paid for the
spread, long premium paid minus short premium
received. Max loss when underlying > = higher
strike
• Reward: Limited to the difference between the
two strikes minus net premium paid for the
position.
• Breakeven: Strike of long put – net premium paid

13. Bear Put Spread
Bear Put Spread Short Put Long Put
K1/K2 50 55
Price SP Prft LP Prft Spread P1/P2 2 -4 -2.0000
46 -2.00 5 3.00
47 -1.00 4 3.00
48 0.00 3 3.00
49 1.00 2 3.00
50 2.00 1 3.00
51 2.00 0 2.00
52 2.00 -1 1.00
53 2.00 -2 0.00
54 2.00 -3 -1.00
55 2.00 -4 -2.00
56 2.00 -4 -2.00
57 2.00 -4 -2.00
58 2.00 -4 -2.00
59 2.00 -4 -2.00
60 2.00 -4 -2.00
Initial
Investment
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
Y-Profit
X-Price
SP Prft LP Prft Spread

14. Bull put spread (credit)
• Strategy: Sell put(short) with a higher strike (ITM)
+ Buy a put(long) with a lower strike (OTM).
• When to use: Investor is moderately bullish.
• Risk: Limited. Maximum loss occurs where the
underlying falls <= lower strike.
• Reward: Limited to net premium credit.
Maximum occurs where underlying > = higher
strike.
• Breakeven: Strike Price of Short Put minus Net
premium received.

15. Bull Put Spread
Bull Put Spread Long Put Short Put
K1/K2 50 55
Price SP Prft LP Prft Spread P1/P2 -3 5 2.0000
46 -4.00 1.00 -3.00
47 -3.00 0.00 -3.00
48 -2.00 -1.00 -3.00
49 -1.00 -2.00 -3.00
50 0.00 -3.00 -3.00
51 1.00 -3.00 -2.00
52 2.00 -3.00 -1.00
53 3.00 -3.00 0.00
54 4.00 -3.00 1.00
55 5.00 -3.00 2.00
56 5.00 -3.00 2.00
57 5.00 -3.00 2.00
58 5.00 -3.00 2.00
59 5.00 -3.00 2.00
60 5.00 -3.00 2.00
Initial
Investment
-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
Y-Profit
X-Price
SP Prft LP Prft Spread

16. Bear call spread (credit)
• Strategy: Sell call (short) with a lower strike(ITM)
+ Buy call (long) with higher strike (OTM).
• When to use: Invested is mildly bearish .
• Risk: Limited to difference between the two
strikes minus the net premium.
• Reward: limited to the net premium received for
the position i.e., premium received for the short
call minus premium paid for the long call.
• Breakeven: Lower strike + net credit.

17. Bear Call Spread
Bear call spread Short Call Long Call
K1/K2 60 65
Price SC Prft LC Prft Spread P1/P2 9 -7 2.000
56 9.00 -7.00 2.00
57 9.00 -7.00 2.00
58 9.00 -7.00 2.00
59 9.00 -7.00 2.00
60 9.00 -7.00 2.00
61 8.00 -7.00 1.00
62 7.00 -7.00 0.00
63 6.00 -7.00 -1.00
64 5.00 -7.00 -2.00
65 4.00 -7.00 -3.00
66 3.00 -6.00 -3.00
67 2.00 -5.00 -3.00
68 1.00 -4.00 -3.00
69 0.00 -3.00 -3.00
70 -1.00 -2.00 -3.00
71 -2.00 -1.00 -3.00
72 -3.00 0.00 -3.00
73 -4.00 1.00 -3.00
Initial
Investment
-8.00
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73
Y-Profit
X-Price
SC Prft LC Prft Spread