In finance, when an investor simultaneously buys an option with a higher premium and sells an option with a lower premium then it results into a debit spread, AKA net debit spread. The investor is referred to as a net buyer and expects the premiums of the two options (the spread) to widen.
Bullish & Bearish Debit Spreads
Debit spreads are needed by the investors to widen for profit.
Calls can be used to construct a bullish debit spread.
Puts can be used to construct a bearish debit spread.
Near month call & put are used to construct a bull-bear phase spread.
Breakeven
- For call spreads breakeven = lower strike + net premium
- For put spreads breakeven = higher strike – net premium
Maximum Potential
For call and put debit spreads the maximum gain and loss potential are the same. You should note that net debit = difference in premiums.
Maximum Gain
Maximum gain = difference in strike prices – net debit, it is realized when both the options are in-the-money.
Maximum Loss
Maximum loss = net debit, it is realized when both the options expire worthless.
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