A spread is created when you take a long and short position in one type of option. Calls are one type and puts are another. So you can only have either a call spread or a sell spread. Long and short calls and the same in puts. The idea of ​​a spread is to take advantage of the difference in premium bought and received or market movement to trigger action on the options themselves, either through a trade or by exercising them.

debit call contracts

The spreads that are created when premiums bought and sold result in a loss for the option trader is a debit spread. This would mean that the investor needs the contracts to perform well to offset the debit. 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 option investor is looking to make these contracts more valuable so that they can be traded or exercised. The profit potential “spread” is between the strike prices. By creating call debit strategies, the investor is bullish on the market. The market rise in this stock is what is needed to make this trading position profitable going forward. The maximum loss is the debit of $200, in case the contracts expire.

This 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 premiums (difference between contracts bought and sold), he or she needs movement in the market to create a trading opportunity.

debit margins

Good trade to you! US Investment Training and brokerjobs.com

Leave a Reply

Your email address will not be published. Required fields are marked *