**Call spread**

A call spread implies buying a call option with a strike price of K1 and simultaneously selling a call option on the same underlying asset and with a similar expiry date, but with a higher strike price of K2. Usually, traders buy call spreads in anticipation of a limited price increase in the underlying asset. The difference between the strike prices of options bought and sold is the strategy's maximum profit less the value of the call spread.

**Chart. Call Spread**

**Example.** Suppose the share of JP Morgan Chase bank is traded at $50. The investor buys for $0.62 a one-month (expiry date in one month) call option with strike price $51 and sells for $0.03 a one-month call with strike price $55. The value of the call spread in this case is $0.62 - $0.03 = $0.59.

The maximum profit from the strategy will be equal to:

$55 – $51 – $0,59 = **$3,41**

if the asset price exceeds $55, and **minus $0.59**, if the asset price is below $51 at the time of expiration. If the price of the asset at expiration stops between $51 and $55, the investor will earn:

Spot price - $51 - $0.59 = Spot price - $51.59

Generally, a call spread strategy is implemented using out of the money (OTM) options. Read Options trading: popular strategies, charts, examples.

**Put Spread**

The put spread option strategy implies:

1) buying a put option with a strike price of K2 and

2) simultaneously selling a put option on the same underlying asset and with the same expiry date but with a lower strike price of K1.

Usually, traders buy put spreads

1) when a limited fall in the price of the underlying asset is expected, or

2) when they expect a change in the volatility skew.

The difference between the strike prices of options purchased and sold is the strategy's maximum profit less the value of the put spread.

**Chart. Put Spread**

Let's assume that the share of Caterpillar is trading at $90. The investor buys for $1 one-month (expiry date in one month) put option with a strike price of $88 and sells for $0.31 one-month put with a strike price of $85. The value of the put spread in this case is $1 - $0.31 = $0.69.

Maximum profit from a strategy can be equal to

$88 – $85 – $0,69 = **$2,31**

if the price of the asset falls below $85, and **minus $0.69** if the price of the asset is higher than $88 at the time of expiration. If the price of an asset stops between $85 and $88 at the time of operation, the investor will earn:

$88 - Spot price - $0.69 = $87.31 - Spot price