Debit spread
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In finance, a debit spread, a.k.a. net debit spread, results when an investor simultaneously buys an option with a higher premium and sells an option with a lower premium. The investor is said to be a net buyer and expects the premiums of the two options (the options spread) to widen.
In finance, a debit spread, a.k.a. net debit spread, results when an investor simultaneously buys an option with a higher premium and sells an option with a lower premium. The investor is said to be a net buyer and expects the premiums of the two options (the options spread) to widen.
Bullish & Bearish Debit Spreads
Investors want debit spreads to widen for profit. A bullish debit spread can be constructed using calls. See bull call spread. A bearish debit spread can be constructed using puts. See bear put spread. A bull-bear phase spread can be constructed using near month call & put.
Breakeven Point
Breakeven for call spreads = lower strike + net premium Breakeven for put spreads = higher strike - net premium
Maximum Potential
The maximum gain and loss potential are the same for call and put debit spreads. Note that net debit = difference in premiums.
Maximum Gain
Maximum gain = difference in strike prices - net debit, realized when both options are in-the-money.
Maximum Loss
Maximum loss = net debit, realized when both options expire worthless.
See also
Credit spread (option)
References
Text derived from https://en.wikipedia.org/w/index.php?oldid=1350255138 under CC BY-SA 4.0; modifications have been made.