Directional Spreads: Verticals

A vertical spread is two options traded together. You buy one and sell the other. Both are the same type (two Calls or two Puts), on the same underlying, with the same expiry and the same quantity. Only the strike differs. Each option is a leg. The strike is the level the contract is struck at, and the premium is its price. The gap between the two strikes is the width. Here it is 25,300 minus 25,000, so 300 points.

Calls carry the CE label and Puts the PE label. Buy the lower Call and sell the higher Call, and you have a bull call spread. Buy the higher Put and sell the lower Put, and you have a bear put spread. Reverse each pair and you get the bear call and the bull put. The type of contract and the direction of the position are different things. A sold Call is still a Call, and a bullish spread can be built from Puts.

A bull call gains when NIFTY finishes higher, up to the upper strike. In our hypothetical grid you buy the 25,000 CE at ₹190 and sell the 25,300 CE at ₹75, same expiry, 65 assumed units. You pay ₹115 per unit, which is ₹7,475 in total. Selling the higher Call cuts the cost of the one you bought. In return you give up any gain above 25,300.

At or below 25,000 both Calls expire worthless, so you lose the whole ₹7,475 debit before costs. At or above 25,300 the long Call is worth exactly 300 points more than the short Call. Subtract the ₹115 debit and the maximum profit is (300 − 115) × 65 = ₹12,025. Breakeven is the bought strike plus the debit: 25,000 + 115 = 25,115.

A bear put gains when NIFTY finishes lower, down to the lower strike. You buy the 25,300 PE at a hypothetical ₹375 and sell the 25,000 PE at ₹190, same expiry, 65 assumed units. The net debit is ₹185 per unit, or ₹12,025. The sold lower Put pays part of the cost, and it also caps how much a further fall can earn you.

At or above 25,300 both Puts expire worthless and you lose the ₹12,025 debit before costs. At or below 25,000 the long Put is worth 300 points more than the short Put, so the maximum profit is (300 − 185) × 65 = ₹7,475. Breakeven is the bought strike minus the debit: 25,300 − 185 = 25,115.

Take the bear put and flip both legs. You sell the 25,300 PE at ₹375 and buy the 25,000 PE at ₹190, same expiry, 65 assumed units. This bull put spread brings in ₹185 per unit, or ₹12,025, on day one. The lower Put you bought limits your loss if NIFTY falls below 25,000. The credit is cash you hold in return for taking on obligations. You have not earned it yet.

At or above 25,300 both Puts expire worthless, and the maximum profit is the ₹12,025 credit before costs. At or below 25,000 the short Put costs you 300 points more than the long Put pays back. The maximum loss is (300 − 185) × 65 = ₹7,475. Breakeven is the sold strike minus the credit: 25,300 − 185 = 25,115.

Flip the bull call. You sell the 25,000 CE at ₹190 and buy the 25,300 CE at ₹75, same expiry, 65 assumed units. This bear call spread brings in ₹115 per unit, or ₹7,475. The higher Call you bought stops your loss from growing above 25,300. The contracts are still Calls, even though the position gains when NIFTY finishes lower.

At or below 25,000 both Calls expire worthless and the maximum profit is ₹7,475 before costs. At or above 25,300 the short Call costs you 300 points more than the long Call pays back. The maximum loss is (300 − 115) × 65 = ₹12,025. Breakeven is the sold strike plus the credit: 25,000 + 115 = 25,115.

Yes. Compare the bull call and the bull put we just worked through. Both lose at most ₹7,475, gain at most ₹12,025 and break even at 25,115. The bear put and bear call match in the same way. This is a feature of our idealised grid, which assumes zero interest and dividends. Debit and credit tell you when the cash moves. They do not describe two different chances of being right.

In this grid, Call premium minus Put premium is zero at the 25,000 strike and −₹300 at the 25,300 strike. That is exactly what put–call parity requires when interest and dividends are zero. Real prices include carry, including the present value of the strike gap. To compare two real trades, value every cash flow on the same date and add funding, bid–ask prices and costs. Do not read our grid as live NSE quotes.

The Greeks estimate how an option’s price reacts to a small change in one input, with the others held still. Delta is the price change per point of the underlying, and Gamma is how fast Delta changes. Theta is the change as one calendar day passes. Vega is the change for a one-point move in implied volatility (IV), the volatility level that an option’s price implies. These are sensitivities. They are not forecasts.

To get the spread’s Greek, add the bought leg’s value and subtract the sold leg’s value, then scale by the quantity. Different strikes have different Greeks, so net Delta is not simply half of one option’s Delta. Being a debit or a credit spread does not fix the sign of Theta, Vega or Gamma. Time left, spot, the strikes and each leg’s IV all change the answer.

Your forecast can be wrong, and a bounded loss can repeat. Four full losses of ₹7,475 add up to ₹29,900 before costs. Brokerage, exchange charges, taxes, funding and slippage reduce profit and can deepen a loss beyond what the chart shows. Check the real bids and asks on both legs. A midpoint or last traded price is not a fill, especially in a thin or fast market.

An order is an instruction. A fill is a trade that happened. NSE allows partial fills, and an immediate-or-cancel order cancels only the part not filled. A broker’s “basket” label does not guarantee both legs fill together. After you send it, check the filled quantity, strike, expiry and order status on each leg. Buy the hedge first, then sell the short. When you leave, close the short first, then release the hedge. This avoids an uncovered gap, but you still face execution risk and a brief extra funding need. A stop trigger only activates an order. It does not guarantee a full exit or the trigger price.

NIFTY index options use European exercise and settle in cash against the exchange’s final settlement index level. European means the option can be exercised only at expiry. You can still close the position earlier by trading the opposite way. NSE Clearing’s settlement-price rules name the index close on the last trading day, with a stated fallback. The early-assignment risk described in OIC’s American-style stock option material is not a NIFTY rule.

Single-stock options in India settle by physical delivery. A long Call that is exercised receives shares and needs the cash to pay for them. A short Call that is assigned delivers shares. A long Put that is exercised delivers shares, and a short Put that is assigned receives shares and needs the purchase funds. If only one leg finishes in the money, the other gives no offset. The gross delivery or purchase amount can be far larger than the spread’s payoff loss. Eligible obligations may net under the rules, so do not assume full gross delivery or automatic cancelling of both legs. Check your broker’s deadlines, your shares and funds, and your actual settlement obligations before expiry.

A sound reading of a vertical keeps three questions apart: what the position pays at expiry, what it costs to close today, and what funds or shares it needs on the way. The next lesson, Straddles and Strangles, asks a different question. It is no longer which way the market moves, but how far.