strategies
Vertical Spread P&L
Defines the risk/reward for bull/bear call or put spreads. The most common defined-risk options strategy.
Formula
Max Profit (credit) = Premium Received Max Loss (credit) = Width - Premium Received Breakeven = Short Strike ± Premium
Variables
- Width
- Distance between strikes (e.g., $5 wide)
- Premium
- Net credit received (or debit paid)
- Short Strike
- The strike you sold
- Long Strike
- The strike you bought (protection)
Worked Example
Inputs
- Strategy
- Bull put spread
- Short
- $95 put (sold)
- Long
- $90 put (bought)
- Credit
- $1.50
Calculation Steps
- 1
Width = $95 - $90 = $5.00 - 2
Max Profit = $1.50 (keep full credit) - 3
Max Loss = $5.00 - $1.50 = $3.50 - 4
Breakeven = $95 - $1.50 = $93.50 - 5
Risk/Reward ratio = $3.50 / $1.50 = 2.33:1
Result: Max Profit $1.50 / Max Loss $3.50 / BE $93.50
Intuition
Vertical spreads are the building blocks of options trading. A narrower spread = less capital, higher ROC but also higher max loss as % of width. Aim for at least 1/3 width as credit for a favorable risk/reward.