Bull Call Spread (Debit Call Spread):

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A debit spread is an options trading strategy that involves both buying and selling options on the same underlying security simultaneously. The key characteristic of a debit spread is that it requires an upfront cost, which is why it's called a "debit" spread. There are two primary types of debit spreads: bull call spreads and bear put spreads.


1. Bull Call Spread (Debit Call Spread):

A bull call spread is used when an investor believes that the price of the underlying asset will rise moderately, but they want to limit their potential losses. It consists of buying one call option while simultaneously selling another call option with a higher strike price but the same expiration date. Here's an example:


Suppose you're interested in Company XYZ, which is currently trading at $50 per share. You believe the stock will go up, but you want to manage your risk. You could set up a bull call spread as follows:


Buy 1 call option with a strike price of $45 for $5 per share.

Simultaneously, sell 1 call option with a strike price of $55 for $2 per share.

In this example, you've spent $5 for the first option but received $2 from selling the second option. Your net cost, or the maximum potential loss, is $3 per share ($5 - $2). This $3 represents the most you can lose with this strategy.


The goal of a bull call spread is to profit from a moderate increase in the stock price. However, your potential profit is limited because you've also sold a call option with a higher strike price.


2. Bear Put Spread (Debit Put Spread):

A bear put spread is used when an investor believes that the price of the underlying asset will decrease moderately, but they want to limit their potential losses. It involves buying one put option while simultaneously selling another put option with a lower strike price but the same expiration date. Here's an example:

Suppose you're bearish on Company ABC, currently trading at $60 per share. You expect the stock price to decline, but you want to manage your risk. You could set up a bear put spread as follows:

Buy 1 put option with a strike price of $65 for $4 per share.

Simultaneously, sell 1 put option with a strike price of $55 for $1 per share.

In this example, you've spent $4 for the first option but received $1 from selling the second option. Your net cost, or the maximum potential loss, is $3 per share ($4 - $1). This $3 represents the most you can lose with this strategy.

The goal of a bear put spread is to profit from a moderate decrease in the stock price, while limiting potential losses.

Debit spreads, whether bullish or bearish, are popular strategies for traders looking to control risk while benefiting from directional price movements in the underlying asset.

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