8  Spread Types and Their Economics

8.1 A spread is a combined payoff

An option spread combines at least two contracts to reshape exposure. Strike, expiration, and option type matter more than the strategy’s informal name. Always write the position legs before interpreting the payoff.

8.2 Common arrangements

Strategy	Basic structure	Main economic idea
Bull call vertical	Buy lower-strike call; sell higher-strike call	Capped upside for a net debit
Bear put vertical	Buy higher-strike put; sell lower-strike put	Capped payoff in a decline
Bull put vertical	Sell higher-strike put; buy lower-strike put	Credit with limited defined expiration loss
Bear call vertical	Sell lower-strike call; buy higher-strike call	Credit with limited defined expiration loss
Calendar	Same strike, different expirations	Exposure to time and volatility term structure
Butterfly	Three strike levels, suitable ratios	Concentrated expiration payoff near middle strike
Iron condor	Put and call credit spreads	Defined expiration range of maximum profit

8.3 A bull call spread example

Buy one call at strike \(100\) for \(6\); sell one call at strike \(110\) for \(2\), both with the same expiration. The net debit is \(4\) per share. At expiration, the maximum value is \(10\) per share, maximum profit is \(6\) per share, and maximum loss is \(4\) per share before costs, assuming positions are held through expiration and settle as expected.

This simple diagram hides early assignment risk, exercise handling, spreads in quoted prices, liquidity, and capital requirements. Realized outcomes can differ when a position is closed early or the short leg is assigned.

Exercise: Sketch net profit versus \(S_T\) for this spread, then ask what changes after 28 days of a 90-day contract.

Note

Living chapter. This is an initial working treatment. Derivations, examples, and references will be expanded in future editions.