Calculating max profit and loss is a skill you will eventually need to master in order to trade, but it'll take time. I think the fastest and most handy thing to memorize as a beginner, however, is which verticals are and which are Knowing these basics can make strategy discussions much easier to follow. When I started learning to trade, I sat down and memorized these relationships, and it did wonders to kickstart my comprehension. I suggest you do the same!
The Four Horsemen
As previously mentioned, there are four different vertical spreads:
We've already touched briefly on short put verticals, and the others look very similar. We will break down detailed risk profiles for each of them in the coming articles, but for now we just need to be aware of the four variations. If the spread is long, then it is a debit spread. If the spread is short, then it is a credit spread. If you've memorized the directional bias of plain naked options, then verticals will be pretty straight forward based on the name... Long call verticals are bullish, short call verticals are bearish. Long put verticals are bearish, and short put verticals are bullish – just like the naked options. Often times, however, we won't have the name to rely on for determining directional risk. We'll have to look at the strikes and figure it out. Luckily, there's a simple trick for determining the directional risk of a spread, and it's centered around the short strike.
How to Decode the Strikes
When it comes to verticals, there is only 1 thing you need to remember to determine bullishness or bearishness: The short strike drives the ship.
If the short strike is lower than your long strike, then the position is bearish. If the short strike is higher than your long strike, then your position is bullish. It's as simple as that!
Examples
Let's say you sell a 50 put and buy a 55 put. The position is bearish because the short put is on the low side.
Long a 43 call, short a 33 call: Bearish because the short call is on the low side
Buy a 43 call, sell a 48 call: Bullish because the short call is on the high side
Long a 21 put, short a 25 put: Bullish because the short put is on the high side