Options Vertical Spread: What is Vertical Spread in Options Trading? : Options, Futures, Derivatives & Commodity Trading

Options Vertical Spread: What is Vertical Spread in Options Trading?

Details about Vertical Spreads in Options trading. Vertical Spreads explained with Example

What is a Vertical Spread in Options Trading?
When an options trader takes multiple option positions where options are of different strike prices but of the same expiry date, then the net position created for such combination of options is termed as "Vertical Spread".

How did the name "Vertical Spread" come into existence for Options Trading?
The name "vertical spread" has a history which dates back to sometimes in the past when option trading was newly introduced.
In the earlier days where there used to be more of floor trading and less (or no) electronic trading, the option chains were displayed on large sized boards at the exchanges.
In these boards, the strike prices were displayed from top to bottom. So as one would see from top to bottom i.e. vertically, he would navigate through the various strike prices of the options. Hence, whenever there is a combination of option positions involving same underlying with varying strike prices, such a combination or "spread" is called a "vertical spread option position"

Related: Horizontal Spreads Explained

What are the common Vertical Spread Positions in Options Trading?
There are a lot of such combinations or spreads available.
For e.g. Long Strangle, Short Strangle, Long Butterfly Spread, Short Butterfly Spread, , Long Gut and Short Gut Options are a few of the examples of vertical spreads.
All these have options of varying strike prices.
In general, any option combination which is on the same underlying but has varying strike prices can be termed as a vertical spread.

Vertical Spread in Options Trading should NOT be confused with what is usually depicted in the payoff functions and charts. In the payoff charts, the strike price is always on the horizontal axis. So it may be confusing that a varying strike price option combination means a horizontal spread. It is not.
Just remember the old style display board - strike prices displayed vertically and hence vertical spread for varying strike prices in options. Even new age terminals like Bloomberg and Reuters also display the option chains in the same fashion.
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