How Max Profit and Loss is Calculated
Long Verticals
The most you can lose on a long vertical is the amount you pay for it. Maximum loss occurs when both options expire out of the money. Remember that since you paid for this position, you want its value to rise so you can sell it back for more money. If the options expire out of the money, they will be worthless and you will lose what you paid for them.
To profit on your long vertical, you want to sell it back for as high of a price as possible. The highest value your vertical can achieve is equal to the width of your strikes. That means if you purchased a $5-wide vertical, $5 is the most you'll ever be able to sell it for. You want your strikes to move deeper in the money so the value of your spread will rise to the maximum. Don't forget to subtract the debit you paid for the spread from your final sale price – the difference is your net profit. In other words, maximum profit for a long vertical is calculated by subtracting the cost of the vertical from the width of the strikes. So if you paid $2.25 for a $5-wide vertical, your max potential profit would be $5 - $2.25 = $2.75.
Short Verticals
As we covered in our previous example with the short put vertical, the maximum loss for short verticals is calculated by subtracting the credit received from the width of the strikes. The maximum profit is simply the credit you collect for selling the spread. Notice how max-loss is calculated the exact same way you calculate the maximum profit of a long vertical? That is because short verticals and long verticals are exact opposites of each other. That means if you can remember how to calculate max profit and loss for one side, you can figure it out for the other side as well! Max profit for one, means max loss for the other, and vise-versa.
P.S. NEVER... EVER... Ever, Ever, Ever, Ever Do This!
When setting up long verticals, there is one fatal mistake you MUST AVOID! Never pay more than the width of your strikes. This would lock in a loss from the start, and leave you with zero chance of ever making any money. Remember that the most you can make on a long vertical is with of the spread, minus the debit paid. If you pay $5.05 for a $5 spread, the best case scenario is you lose $0.05:
$5 - $5.05 = -$0.05
The worst case scenario is you could lose the entire $5.05! Think about it this way... You would never sell something for $0.00. Buying that $5-wide spread for $5.05 is worse. You're actually paying someone $0.05 to potentially take the rest of your $5. Not a good business plan! Just wanted to point this out, so you can avoid making this silly mistake XX.