Debit Spread
Encyclopedia
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.
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.
.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, a debit spread, AKA net debit spread, results when an investor simultaneously buys an option
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
with a higher premium
Premium
Premium may refer to:* Premium , a promotional item that can be received for a small fee when redeeming proofs of purchase that come with or on retail products....
and sells an option with a lower premium. The investor is said to be a net buyer
Net buyer
-Definition:A person who buys more than sells and therefore is in a net long financial position....
and expects the premiums of the two options (the options spread
Options spread
Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates. Options Spreads are limited risk and...
) 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
- 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-moneyIn the Money
In the Money is a comedy film starring The Bowery Boys. The film was released on February 16, 1958 by Allied Artists Pictures and is the forty-eighth and final film in the series. It was directed by William Beaudine and written by Al Martin and Elwood Ullman.-Plot summary:Sach is hired to take...
.