This 9-Minute Video Will Teach You the 4 Numbers That Make Every Vertical Spread Decision Simple.

Key Concepts

• Vertical Spread: An options strategy involving the simultaneous purchase and sale of two options of the same type (calls or puts) with the same expiration date but different strike prices.
• Defined Risk: A strategy where the maximum loss is known at the time of trade entry.
• IVR (Implied Volatility Rank): A metric indicating the current level of implied volatility relative to its range over the past 12 months.
• Mean Reversion: The theory that asset prices and volatility will eventually return to their long-term average levels.
• Theta (Time Decay): The rate at which an option's value decreases as it approaches expiration.
• DTE (Days to Expiration): The number of days remaining until an option contract expires.
• Debit/Credit: The cost paid (debit) or premium received (credit) when opening a spread.

1. Strategic Framework for Vertical Spreads

The speaker emphasizes that beginners should exclusively use defined risk strategies to protect against significant losses while learning. Vertical spreads are categorized into two groups for the purpose of this checklist: Long Verticals (Long Call/Put Spreads) and Short Verticals (Short Call/Put Spreads).

2. The Checklist Variables

Implied Volatility Rank (IVR)

• Long Verticals: Best utilized when IVR is low (0–10% or negative). The goal is to buy premium cheaply and benefit if volatility expands (mean reverts higher).
• Short Verticals: Best utilized when IVR is high (30%+). The goal is to sell premium at a high price and benefit if volatility contracts (mean reverts lower).

Cost of Strategy (Debit vs. Credit)

• Long Verticals (Debit): Aim to pay approximately 50% of the width of the strikes. For example, on a $2 wide spread, pay ~$1.00.
• Short Verticals (Credit): Aim to collect at least 33% to 40% of the width of the strikes. This threshold is designed to provide a probability of profit (POP) of 60% or higher.

Strike Selection

• Long Verticals: The current stock price should "straddle" the center of the spread. By placing the stock price in the middle, the trader achieves a roughly 50/50 probability of success while neutralizing the negative impact of theta.
• Short Verticals: There is no fixed rule; strike selection is dictated by the credit received. If the desired credit (33–40% of width) cannot be achieved, the trader is advised to "walk away" rather than force a trade.

Duration (DTE)

• Short Verticals: Target 45 DTE. This is identified as the "sweet spot" on the decay curve where extrinsic value begins to drop off more rapidly, favoring the premium seller.
• Long Verticals: Offers more flexibility. Because the strategy is not reliant on time decay, traders can use shorter cycles (7–14 days) or longer cycles (45 days) depending on their specific directional thesis.

3. Key Arguments and Perspectives

• Risk Management: The speaker argues that the primary benefit of vertical spreads for beginners is the "defined risk nature," which prevents catastrophic losses during the learning phase.
• Theta Neutrality: A key argument for the "straddle" approach in long verticals is that it offsets the negative theta of the long option with the short option, making the trade a cleaner directional play.
• Discipline: The speaker stresses that if the market conditions (skew, volatility, or pricing) do not align with the checklist, the most professional action is to refrain from trading.

4. Notable Quotes

• "If you are brand new to trading, I cannot possibly recommend enough. You should only be doing defined risk strategies."
• "You've got to crawl before you can walk. You've got to walk before you can run."
• "If you're just not getting paid enough to compensate you for the risk in the trade... just walk away."

5. Synthesis and Conclusion

The vertical spread checklist serves as a disciplined framework for balancing risk and probability. By aligning the strategy with IVR, targeting specific credit/debit ratios, and selecting appropriate DTEs, traders can move from speculative guessing to a probabilistic approach. The core takeaway is that while long verticals are directional plays that benefit from volatility expansion, short verticals are premium-selling strategies that rely on time decay and volatility contraction. Beginners are urged to prioritize risk definition over potential returns until they have gained sufficient experience.