Debit Spread (Options)
The term debit spread refers to an options strategy where the premiums received are less than those paid. Debit spreads result in funds being debited to the investor's account when the position first is established.
ExplanationWhen the premium paid for the long leg of a spread is greater than that received from the short leg, the position is referred to as a debit spread and results in funds being withdrawn from the trader's account. Debit spreads are a low risk, low reward strategy. The net debit paid when the position is established is the maximum loss possible.
Debit spreads typically take one of the following forms:
- Bull Call Spreads: if the trader is bullish on the underlying security, they can establish a bull call spread by buying a higher premium at-the-money call option and selling a lower premium out-of-the-money call option on the same underlying security and the same expiration date.
- Bear Put Spread: if the trader is bearish on the underlying security, they can establish a bear put spread by buying a higher premium in-the money put option and selling a lower premium out-of-the-money put option on the same underlying security and the same expiration date.