what is a debit spread

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Hal what is a debit spread. How would I do one on robinhood?

A)

 A debit spread is an options trading strategy that involves buying and selling two options of the same type (either calls or puts) with the same expiration date, but different strike prices. It's called a "debit" spread, because you typically pay a net debit to open the position. The amount you pay to buy the option is more than the amount you receive from selling the other option.

Here's a breakdown:

Bull Call Debit Spread: This is when you buy a call option at a specific strike price, and simultaneously sell another call option with a higher strike price. The goal is to profit from a moderate upward move in the underlying stock.

Bear Put Debit Spread: This is when you buy a put option at a specific strike price, and simultaneously sell another put option with a lower strike price. The goal is to profit from a moderate downward move in the underlying stock.

Example Using Robinhood:

Let's use a Bull Call Debit Spread as an example:

Underlying Stock: Imagine a stock called XYZ is currently trading at $50.

Buy a Call: You believe XYZ will go up, but not by a lot. You decide to buy a call option with a strike price of $52 that expires in one month. The premium (cost) for this call option is $2.

Sell a Call: To offset the cost of the bought call, you decide to sell a call option with a strike price of $55 that expires on the same date. The premium you receive for selling this call is $1.

Your net debit (cost) for this spread is $1 ($2 paid - $1 received).

Profit/Loss Scenarios:

Maximum Profit: If XYZ closes at $55 or higher at expiration, both options are in-the-money. The $52 call you bought would be worth $3, and the $55 call you sold would be worth at least $3 less than the $52 call due to the strike difference. Thus, your profit would be the $2 spread minus the $1 net debit, or $1 per share (excluding fees and commissions).

Maximum Loss: If XYZ closes below $52 at expiration, both options expire worthless. You lose your net debit of $1 per share.

Breakeven Point: XYZ needs to close at $53 (the $52 strike price of the bought call + the $1 net debit) to break even.

On Robinhood, you would execute a debit spread by first selecting the stock or ETF you want to trade. Then, navigate to the options trading section, choose the same expiration date for both legs (the buy and the sell), and select the respective strike prices. The platform will recognize this as a debit spread and should show you the net debit or credit for the trade. Always double-check the numbers and ensure you understand the risks before executing the trade.

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