Call spread ($(S_T-K_1{)}^{+}-(S_T-K_2{)}^{+}$)

A call spread combines a long European call option of strike $K_1$ with a short European call of higher strike $K_2>K_1$, on the same underlying financial asset and expiry. Its terminal financial payoff isThe higher-strike call cancels the growth beyond $K_2$, leaving a capped increasing payoff. The opposite long/short convention negates this payoff.

For strikes $100$ and $110$, terminal prices $90,105,120$ give payoffs $0,5,10$. These are payoff calculations before accounting for the initial price of the position. Dividing by $K_2-K_1$ gives a continuous ramp between zero and one, which approaches the indicator of $S_T>K_1$ as the upper strike decreases to the lower one, away from the strike itself. This makes call spreads useful mathematical building blocks for approximating digital payoffs.