Vertical spread - Wikipedia

Options vertical spread


    Break-even at Expiration Strike A plus net debit paid.

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    Maximum Potential Profit Potential profit is limited to the difference between strike A and strike B minus the net debit paid. Maximum Potential Loss Risk is limited to the net debit paid.

    Ally Invest Margin Requirement After the trade is paid for, no additional margin is required.

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    As Time Goes By For this strategy, the net effect of time decay is somewhat neutral. Implied Volatility After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices.

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    If options vertical spread forecast was correct and the stock price is approaching or above strike B, you want implied volatility to decrease. If your forecast was incorrect and the stock price is approaching or below strike A, you want implied volatility to increase for two reasons. First, it will increase the value of the option you bought faster than the out-of-the-money option you sold, thereby increasing the overall value of the spread.

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    Second, it reflects an increased probability of a price swing which will hopefully be to the upside. Use the Technical Analysis Tool to look for bullish indicators.

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