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 spread) to widen.
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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 usin 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-money.
Maximum Loss
Maximum loss = net debit, realized when both options expire worthless.
See also
References
- McMillan, Lawrence G. (2002). Options as a Strategic Investment (4th ed. ed.). New York : New York Institute of Finance. ISBN 0-7352-0197-8.
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