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Let’s take a quick look at this particular spread. We’re buying one call, we’re selling one call. The difference – and I should remind you, this is in the same month. This is in June. The strike price of the one that we’re buying is 75. The one that we’re selling is 80. The difference between these two is 5 points, so this is considered a 5-point vertical spread.
The vertical means that it’s in the same month, and in the same option. They’re both call options. Now, if we were to take the $4.10 and subtract it from the $1.70, because we’re selling that one, we’re actually receiving a credit of $1.70. We’re paying $4.10 for the call option, but we’re getting a credit of $1.70.
If we subtract those two, that is what we pay as a debit for this particular spread. $4.10 minus $1.70 is $2.40. That’s what we would pay to put this vertical spread on. It’s also called a bullish vertical spread, because we are making a directional play here. We are anticipating that the stock is going to go up. This 75 call, this 80 call – it’s a $5 vertical spread, or a bull call spread. That means that if the stock does go up, we will make money.
How much money will we make? Well, we just calculated the difference between these two prices, and it comes to $2.40. The difference between the strike prices is $5. The difference between the $5 strikes and the $2.40 that we purchased this spread for, is $2.60. $2.60, if we hold this all the way to the expiration in June, is the maximum amount of money that we’ll make on this spread.
You can see that vertical call spreads – their advantages are that we protect our long call with the sale of another call, above the strike price. That helps to bring in a little bit of premium. We’re paying $4.10 for this. We actually get the $1.70 deposited into our account, making our net debit here $2.40 for this spread, that can be worth 5 at expiration.
Our maximum profit is $2.60.
Like I said, we have a spread here that’s $2.40. Now, our maximum profit is $2.60. For us to enter these positions individually, we’re paying the retail prices. We’re collecting the $1.70, which is the bid price. Were paying 4.10, which is the asking price. The $2.40 for this spread is the retail price of this spread.
Let me close this out for a second. Remember the $2.40 that it cost to put on this spread? Instead of entering those orders individually, what we can do is right click on the option that we want to buy, go over to “Buy vertical,” and we can see that it brings up both the option that we want to buy, and the option that we want to sell, in the same order entry box.
Now, we can enter this order as a spread. The mid-price is $2.20. The natural price is $2.40. Remember, the $2.40 was the amount that we had entered – the amount of the spread, when we had clicked on each individual option.
We have the option, when we bring these up as a vertical spread, and enter this order as a spread, rather than individually. We can actually have the opportunity of purchasing this spread for $2.20, which is the mid-price between these two sets of options. That saves us $20 cents on this particular option.
Let’s just, for an example – we’re only using one contract here, but let’s confirm and send this, and bring up that dialog box. It will cost us $240 if we were paying the retail price, which is the natural price for this, plus a $3 commission, and it will cost us $243 to enter this order.
As I mentioned, if we’re paying $240 for this spread, the strike price difference between these two options is $5. Our maximum profit is $2.40 minus the $5, which is the difference between these strikes – which is $2.60. That’s exactly how they calculated our maximum profit in the dialog box. Our maximum profit is $2.60 on this spread.
Our maximum loss is $240, which is $2.40 per spread. Which is the exact amount that we paid for the spread. The most you can lose in a vertical spread, is exactly what you paid for it. That’s the maximum amount of money that you can lose. You can’t lose any more