A spread is created when a long and short position is taken on a type of option. Calls are one type and puts are another. Thus you can only have a call spread or a put spread. Long and short calls and the same on puts. The idea on a spread is to profit on the premium difference bought and received or on the movement of the market to trigger action on the options themselves – either through a trade or exercising them.
Debit Call Contracts
Spreads that are created when the premiums bought and sold results in a loss for the options trader is a debit spread. This would mean the investor needs the contracts to perform well to make the debit up. Debit spreads can be bullish or bearish.
Strategy Example
Buy 1 LTD Nov 40 Call for $300
Short 1 LTD Nov 50 Call for $100
These call options that were bought and sold resulted in a debit for this trader. The debit is $200. The options investor is looking for these contracts to become more valuable so they can be traded or exercised. The “spread” profit potential is in between the strike prices. When creating call debit strategies, the investor is bullish on the market. The market rising on this stock is what is needed for this trading position to be profitable going forward. The maximum loss is the $200 debit – should the contracts expire.
The above would also be considered a Bullish spread because the investor is looking for the market to rise and trigger action on the options. When a spread trader loses on the premiums (difference between the contracts bought and sold) – he or she needs movement on the market to create a trading opportunity.
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