finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...

, a debit spread, a.k.a. net debit spread, results when an investor simultaneously buys an option with a higher

premium Premium may refer to: Marketing * Premium (marketing), a promotional item that can be received for a small fee when redeeming proofs of purchase that come with or on retail products * Premium segment, high-price brands or services in marketing, ...

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 Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling options of the same class on the same underlying security but with different strike prices or expiration dates. A ...

) 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 In options trading, a bull spread is a bullish, vertical spread options strategy that is designed to profit from a moderate rise in the price of the underlying security. Because of put–call parity, a bull spread can be constructed using either ...

. 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 In finance, moneyness is the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative, most commonly a call option or a put option. Moneyness is firstly a thr ...

Maximum Loss

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

References