Quick Answer
A vertical spread pairs two options of the same type and expiration at different strikes: a debit spread (call bull, put bear) profits as the gap widens toward the strike difference; a credit spread (call bear, put bull) profits as the gap narrows toward zero. A calendar spread trades time decay. A conversion or reversal arbitrages mispriced put-call parity.
The whole unit on one sheet: four verticals that split by debit or credit and by direction, plus the two non-directional spreads.
How Do You Build Each of the Four Verticals?
- Call bull spread (debit): buy the lower-strike call, sell the higher-strike call. Bullish; profits as the gap widens.
- Call bear spread (credit): sell the lower-strike call, buy the higher-strike call. Bearish; profits as the gap narrows.
- Put bull spread (credit): sell the higher-strike put, buy the lower-strike put. Bullish; profits as the gap narrows.
- Put bear spread (debit): buy the higher-strike put, sell the lower-strike put. Bearish; profits as the gap widens.
- The pairing rule: a bull view splits into one debit (calls) and one credit (puts); a bear view splits into one debit (puts) and one credit (calls).
Which Numbers Matter Most?
| Spread | Debit / credit | Spread moves | Max profit | Max loss |
|---|---|---|---|---|
| Call bull | Debit | Widens | strike difference minus debit | debit |
| Call bear | Credit | Narrows | credit | strike difference minus credit |
| Put bull | Credit | Narrows | credit | strike difference minus credit |
| Put bear | Debit | Widens | strike difference minus debit | debit |
Maximum profit plus maximum loss always equals the strike difference.
Worked check: the 100 and 110 strikes with a 4-point debit or credit (strike difference 10) drive every row. Debits (call bull, put bear): max profit 10 minus 4 = 6, max loss 4. Credits (call bear, put bull): max profit 4, max loss 10 minus 4 = 6. Breakeven is 100 plus 4 = 104 for both call spreads, 110 minus 4 = 106 for both put spreads: same strikes, same breakeven within each pair, but profit and loss trade places between the debit and its credit mirror.
How Is a Calendar Spread Different From a Vertical?
- An option calendar spread is a horizontal (time) spread: same option type, same strike, two different expirations. Sell the near-term option, buy the longer-dated one, usually for a net debit.
- It profits from time decay: the near leg fades faster than the far leg. It is direction-neutral at entry, does best near the strike, and a big move away hurts it, loss floored at the debit.
- It is not the futures calendar (carrying-charge) spread from the spreading chapter, which trades carry and caps only one side. The option calendar caps both sides.
What Do a Conversion and a Reversal Lock In?
- Both rest on put-call parity: buying a call and selling a put at the same strike and expiration replicates a synthetic long futures. When prices drift out of that relationship, a near-riskless arbitrage opens.
- Conversion = long futures + long put + short call, used when the call is overpriced. The long put and short call form a synthetic short futures that offsets the real long futures.
- Reversal = short futures + long call + short put, used when the call is underpriced. The long call and short put form a synthetic long futures that offsets the real short future.
- Both are hedged and near-riskless, profiting from the mispricing, not from where the futures settles.
Which Gotchas Trip Students Up?
- Debit widens, credit narrows. Call bull and put bear (debits) need the gap to grow; call bear and put bull (credits) need it to collapse. Flipping this reverses the trade.
- A put bull spread is bullish, even though it is built entirely from puts. Direction comes from the position, not the option type.
- An option vertical caps BOTH sides; a futures calendar spread caps only ONE. Do not import the futures-carry logic into an option calendar question.
- A rich call signals a conversion; a cheap call signals a reversal. Swapping the option legs of either turns a hedged position into an unhedged one.
What Is the Memory Aid for Debit Versus Credit?
Pay a Debit, you want the gap to Distend (widen). Take a Credit, you want it to Close (narrow).
One-Breath Recap
The four verticals split by cash flow and direction: call bull (buy lower, sell higher call) and put bear (buy higher, sell lower put) are debits that profit as the strike gap widens; call bear (sell lower, buy higher call) and put bull (sell higher, buy lower put) are credits that profit as the gap narrows. Maximum profit plus maximum loss always equals the strike difference. A calendar spread instead sells a near-term option and buys a longer-dated one at the same strike, trading time decay, direction-neutral and best near the strike. A conversion pairs long futures with a synthetic short future from options when the call is overpriced; a reversal mirrors it, pairing short futures with a synthetic long future, when the call is underpriced.
Need more than the recap? Read the full Option Spread Strategies unit.