Debit spread

Debit spread

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.

Contents

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-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. ed.). New York : New York Institute of Finance. ISBN 0-7352-0197-8. 
v · d · eDerivatives market
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Market issues

Tax policy · Consumer debt · Corporate debt · Government debt · Late 2000s recession

External links

v · d · eDerivatives market
Derivative (finance)
Options
Terms

Credit spread · Debit spread · Exercise · Expiration · Moneyness · Open interest · Pin risk · Risk-free rate · Strike price · The Greeks · Volatility
Vanilla options

Collar · Fence · Iron butterfly · Iron condor · Straddle · Strangle · Covered call · Protective put · Risk reversal

Binomial · Black · Black–Scholes · Finite difference · Garman-Kohlhagen · Put–call parity · Simulation · Trinomial · Vanna Volga method
Swaps
Forwards and Futures
Other derivatives

Credit default option · CLN · Contract for difference · CPPI · Credit derivative · ELN · Equity derivative · Foreign exchange derivative · Fund derivative · Inflation derivatives · Interest rate derivative · PRDC · Real estate derivatives · Real options
Market issues

Tax policy · Consumer debt · Corporate debt · Government debt · Late 2000s recession



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