A combination of two calls with the same expiry and different strike prices is one form of vertical spread. For calls, a combination with the same strike price and different expiries is a calendar spread (horizontal spread), and one with different strike prices and different expiries is a diagonal spread1.

Consider a hypothetical example in which a call with a strike price of 100 yen is bought for a premium of 5 yen and a call with a strike price of 110 yen is sold for a premium of 2 yen. The net cost is 3 yen. This form, buying the lower-strike call and selling the higher-strike call, is called a bull call spread. In this form, both the loss and the profit have a limit. If the price of the underlying asset at expiry is 110 yen or higher, the profit stops at 110 − 100 − 3 = 7 yen. At 100 yen or lower, the loss stops at the 3 yen paid. If you only bought the call, the loss would be at most 5 yen, with no upper limit on profit. The premium from the sold call reduces the amount paid, in return for putting a ceiling on profit2.

"Spread" is also used in other senses. In the JPX glossary, the price difference between the bid and the ask (bid-ask spread) and the price difference between two securities or indices are also called "spread". A trade that uses the price difference between contract months of futures is called "spread trading"3. The option spread here is a different concept from those.

Notes

  1. The Options Industry Council, the Description of the Bull Call Spread page (a bull call spread is a vertical spread containing two calls with the same expiry and different strikes) and of the Long Call Calendar Spread page (the same strike with different expiries is a horizontal spread, and different strikes and expiries make it a diagonal spread). ↩

  2. Osaka Exchange, "デビットスプレッド戦略" (Debit spread strategy) (in Japanese), which explains combining the purchase of a call with the sale of a call at a higher strike price. The maximum loss is smaller than buying the call alone, but the profit above the strike price of the sold call is offset. The figures in the example are hypothetical. ↩

  3. Japan Exchange Group, "スプレッド（用語集）" (Spread, glossary) and "スプレッド取引（用語集）" (Spread trading, glossary) (in Japanese). ↩