Definition
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.
Explanation
When 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greater than that received from the short leg, the position is referred to as a debit spread and results in funds being withdrawn from the trader's account.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.
Related Terms
The term delta refers to the rate of change in the theoretical premium paid or received for an option for one unit change in the price of the underlying asset. Delta values for call options will always be positive, while those for a put will always be negative.
Moneyzine EditorJanuary 15th, 2024
The term delivery refers to the process of fulfilling the terms of an options contract following the notification of assignment. While delivery can apply to options and forward contracts, a position is oftentimes closed out prior to the expiration date to avoid delivery.Moneyzine EditorJanuary 15th, 2024- The term time decay refers to the theoretical decline in the value of an option over time. Time decay directly affects the extrinsic value of an option.Moneyzine EditorSeptember 21st, 2023
The term credit spread refers to an options strategy where the premiums received are greater than those paid. Credit spreads result in funds being credited to the investor's account when the position is first established.Moneyzine EditorJanuary 12th, 2024
