Vertical spreads are just about any type of investment strategy that involves the simultaneous sale and purchase of options with specific common features. In general, both the transactions will include stock options that are of the same class and expiration date. However, the option sold and the option purchased do not have to carry the same strike price.
A vertical spread can involve any options that are of the same type. That is, the option strategy can be based on activity including two puts or two calls. For instance, an investor may choose to purchase a call at a rate of a $100 US Dollars in United States currency, while at the same time selling a call for a rate of $110 (USD). As long as the options strategy includes the purchase and sell of stocks of the same class and with the same expiration date, the overall transaction can be properly referred to as a vertical spread.
The obvious advantage of a vertical spread is that the investor can make money from the process. When a put or call is sold at a rate per unit that is higher than the put or call that is purchased, there is an immediate return. At the same time, the focus may not be on making a profit, but unloading a stock option that shows indications of slowing down while acquiring a similar stock that is projected to rise in the short term. While not initially generating profit for the investor, this approach will increase the value of the portfolio, assuming the acquired stock performs according to the projections.
A vertical spread can take place in a number of market settings. The spread may be utilized in bull markets as well as bear markets. Over the years, a variety of different types of vertical spread strategies have been developed to work within a given set of conditions in the marketplace, such as bull and bear vertical spreads, front spreads, and back spreads.
