In finance, a debit spread, a.k.a. net debit spread, results when an investor simultaneously buys an

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with a higher

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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

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) to widen.

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 Point

*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.

References