Debit spread

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In finance, a debit spread, AKA 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[edit]

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[edit]

  • Breakeven for call spreads = lower strike + net premium
  • Breakeven for put spreads = higher strike - net premium

Maximum Potential[edit]

The maximum gain and loss potential are the same for call and put debit spreads. Note that net debit = difference in premiums.

Maximum Gain[edit]

Maximum gain = difference in strike prices - net debit, realized when both options are in-the-money.

Maximum Loss[edit]

Maximum loss = net debit, realized when both options expire worthless.

See also[edit]

References[edit]

  • McMillan, Lawrence G. (2002). Options as a Strategic Investment (4th ed. ed.). New York : New York Institute of Finance. ISBN 0-7352-0197-8.