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A spread is the buying and selling of the same type of option (Puts or Calls) to achieve a spread within the strike prices or the premiums. When an options trader establishes this strategy where the net premiums results in an initial loss - he has created a debit spread.
The goal in a debit spread is to make money on trading the option later or having them exercised together. Debit strategies can be bullish or bearish. Call debit spreads are bullish. Put debits are bearish.
Put Debit Spread Strategy
Buy 1 DFT Oct 85 Put@6
Short 1 DFT Oct 80 Put@3
This trading strategy has resulted in a net premium loss of $300, so this is a debit spread where the options investor wants the spread to widen. Widening refers to the value of the contracts growing and the premiums to increase. This gives the trader the ability to close these out above his initial debit loss.
The investor is also bearish on the market. The options gaining value and strength is the goal on a debit spread. Since he is working put options, the market declining will increase the value of the options. If the contracts are exercised, the long put (the right to sell) is higher than the short put (the obligation to buy). That is why Put debit spreads are always bearish.
Call Debit Spread Strategy
Buy 1 ERT Aug 30 Call@5
Short 1 ERT Aug 40 Call@1
Call spread strategies where a trader has established a position resulting in a net loss of premium has created a debit spread. Call debits are bullish.
The profit in this trading strategy rests with the increase in value of the options in play. Since the investor is using call options, the only market direction that will widen and bring these contracts higher is an up market or bullish.
The gain is in the strike prices, minus the premium loss.
Intrinsic Value Option Contract
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Copyright  2006 American Investment Training, Inc.
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