Debit Spread options

 

Debit Spread:

A debit spread is an options trading strategy where you simultaneously buy and sell two options of the same type (either both call options or both put options) on the same underlying asset but with different strike prices. This strategy results in a net debit (cost) to your trading account.

Example of a Debit Call Spread:

Let's say you believe the stock of Company XYZ, currently trading at $50 per share, will go up moderately, but you want to limit your risk. You can create a debit call spread as follows:

Buy 1 call option with a strike price of $55 for $3 per share.

Simultaneously, sell 1 call option with a strike price of $60 for $1 per share.

In this example, you've spent $3 for the first option, but received $1 from selling the second option. So, your net debit is $2 per share ($3 - $1). This $2 is the maximum loss you can incur with this strategy.

The goal of a debit call spread is to profit from the rising stock price, but your potential profit is limited because you've also sold a call option with a higher strike price.

Credit Spread:

A credit spread is another options trading strategy, where you simultaneously sell one option and buy another option of the same type on the same underlying asset. Unlike a debit spread, a credit spread results in a net credit (money received) to your trading account.