Skip to main content
Track Vertical debit spread
28 / 29
Search the archiveLibrary
Library

2020issue C1144-47

Combining vertical debit spreads on a volatility product

The same bullish thesis on an implied-volatility product can be written as an in-the-money bull call spread or an out-of-the-money bull call spread, with different expiration payoffs at the same underlying price. Adjacent 24/30 and 30/50 verticals cancelled at the 30 strike and left a 24/50 merged vertical.

  • An in-the-money bull call spread and an out-of-the-money bull call spread can share one bullish thesis while producing different expiration payoffs at identical underlying prices.
  • The out-of-the-money spread needed a larger underlying advance to reach its expiration breakeven than the in-the-money spread, which capped once the underlying reached the short strike of 30.
  • Combining the 24/30 and 30/50 bull call spreads cancelled the overlapping 30-strike legs and left a 24/50 merged vertical described as costing 363 for a one-lot, with an expiration breakeven of 27.63.
  • The compared structures were framed as a tradeoff among objectives, and the verticals sat on a listed implied-volatility product rather than on a single cash equity.
Entries in this reading3 entries
Current trackVertical debit spread30 readingsOption spread61 readingsImplied volatility analysis70 readings

Two spreads, one thesis

An in-the-money bull call spread and an out-of-the-money bull call spread on the same implied-volatility product can share a bullish thesis while producing different expiration payoffs at identical underlying prices. A vertical debit spread is a same-expiry long option and short option of the same type, entered for a net debit, with the short strike farther from the money.

The in-the-money bull call spread has its long strike already below the underlying price at entry, which lowers the expiration hurdle and caps payoff at the short strike. The out-of-the-money bull call spread has its long strike above the underlying price at entry, which raises the expiration hurdle in exchange for a larger distant payoff.

Different expiration hurdles

In the illustrated comparison, the out-of-the-money bull call spread required a larger underlying advance to break even at expiration than the in-the-money spread. The in-the-money bull call spread reached a stated maximum once the underlying arrived at the short strike of 30 and collected no further payoff above that level.

How the merged vertical is formed

Combining a 24/30 bull call spread with a 30/50 bull call spread cancels the overlapping 30-strike legs and leaves a single 24/50 debit spread. That merged vertical is a wider debit spread formed by combining two adjacent verticals so the overlapping intermediate strike cancels.

The combined 24/50 debit spread was described as costing 363 for a one-lot, with an expiration breakeven of 27.63. The expiration breakeven is the underlying price at which a vertical held to expiry recovers its net debit.

Pre-expiration risk curves

The illustrated pre-expiration risk curves for the combined spread moved into profitable territory before expiration if the underlying began to rally. A pre-expiration risk curve is the marked-to-market profit-and-loss path of an option structure as the underlying moves before expiry.

A tradeoff among objectives

The compared structures were framed as a tradeoff among objectives rather than as a single best trade, with the merged vertical presented as a way to hold more than one objective at once. The verticals were built on a listed implied-volatility product rather than on a single cash equity, so the spread geometry sits inside an implied-volatility market regime.

Expiration P/L for ITM versus OTM VXX bull-call spreads

Once VXX finishes at 30 the 24/30 in-the-money spread is already capped at 435 dollars, so extra upside adds nothing, while the 30/50 out-of-the-money spread is still a 213-dollar loss at 30 and only pays if VXX is well above 32. The points are the expiration P/L table printed with the article, not a traced curve.
Once VXX finishes at 30 the 24/30 in-the-money spread is already capped at 435 dollars, so extra upside adds nothing, while the 30/50 out-of-the-money spread is still a 213-dollar loss at 30 and only pays if VXX is well above 32. The points are the expiration P/L table printed with the article, not a traced curve.VXX · expiration

One-lot payoffs at expiration. VXX was 24.33 dollars at the stated entry; the 24/30 debit is 165 dollars and the 30/50 debit is 213 dollars.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
28 of 29 in the Vertical debit spread track
20251-51 pp.Next on Vertical debit spreadTime decay as a decision variable in an NVDA bull call spreadA same-expiry NVDA bull call spread can be specified as buying the August 15 140 call and selling the higher-strike August call so the sold premium reduces the net debit.
All readings on this track · 29 readings
  1. 1986Rank listed calls against a vertical debit inside one forecast band
  2. 1990Constructing vertical debit spreads around implied volatility
  3. 1994Even-money call spread after a stop-limit gap
  4. 1995Payoff anchors for bull and bear vertical spreads
  5. 1995Matching vertical spreads to forecast confidence
  6. 1997A defined-risk short vertical as a single testable procedure
  7. 1998Vertical debit spreads when implied volatility is elevated
  8. 2001Constructing vertical debit spreads with a preset risk-reward filter
  9. 2002Regime-first construction of vertical debit spreads
  10. 2003Sizing a vertical by the constraint you can enforce
  11. 2006Event premiums, straddle bias, and volatility-hedged spreads
  12. 2006From a winning long call to a bull vertical debit spread
  13. 2007Vertical debit spread construction from codes and premiums
  14. 2010Vertical construction as a bounded-risk procedure
  15. 2010Zero-cash repair of an underwater long
  16. 2011Cheap long calls and in-the-money debit vertical marks
  17. 2011Vertical debit value path, volatility, liquidity, and box exits
  18. 2013Constructing defined-risk vertical call spreads
  19. 2014Protective put versus seasonal debit spread
  20. 2014One bearish energy thesis, three strike geometries
  21. 2014Coffee versus equity as a two-sided debit-spread drill
  22. 2015Natural-gas thesis: ETF drag versus a call debit spread
  23. 2017Funding a call spread with an offsetting put spread
  24. 2018An expected-value test for vertical option spreads
  25. 2019Option ladder construction for financed vertical debits
  26. 2020One-week call versus bull-put premium tradeoffs
  27. 2020Constructing in-the-money versus out-of-the-money bull call debit spreads
  28. 2020Combining vertical debit spreads on a volatility product
  29. 2025Time decay as a decision variable in an NVDA bull call spread
By fieldOptions and volatility171 readingsBy year202085 readings
All 30 readings tagged Vertical debit spread
Also on Vertical debit spread5 readings
1990Constructing vertical debit spreads around implied volatility1998Vertical debit spreads when implied volatility is elevated2011Cheap long calls and in-the-money debit vertical marks2015Natural-gas thesis: ETF drag versus a call debit spread2020Constructing in-the-money versus out-of-the-money bull call debit spreads