Debit spread

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

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