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Debit
Spreads (Bull
Call Spreads, Bear Put Spreads)
A
debit spread is one in which you buy an option and then
sell a
lower priced option, thus generating a net debit to your
account. Debit spreads can be bearish or bullish.
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Strategies
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Bull
Call Spread
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Component
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Buy
lower strike price call, sell higher strike price
call of the same month
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Potential
profit
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Maximum
loss
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Net
premium paid
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Time
value impact
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Neutral
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Break-even
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Lower
strike price plus net premium paid
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As different from a Bull Put
Spread which would result in net premium received,
a Bull Call Spread would result in net premium
paid, as the premium for the lower strike price
call is higher than that of the higher strike
price call.
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Example:
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Component
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Buy
ABC May $190 Call, pay $30, and sell ABC May $220
Call, receive $10
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Net
Premium
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Pay
$30-$10=$20
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Break-even
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$190+$20=$210
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Profit
when
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Stock
price is above $210
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Potential
Profit
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($220-$190)-$20=$10
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Potential
Loss
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$20
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Time
Value Impact
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Neutral
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Strategies
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Bear
Put Spread
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Component
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Sell
lower strike price put, buy higher strike price
put of the same month
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Potential
profit
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Maximum
loss
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Net
premium paid
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Time
value impact
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Neutral
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Break-even
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Higher
strike price minus net premium paid
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As different from a Bear Call
Spread which would result in net premium received,
a Bear Put Spread results in net premium paid, as
the premium for the lower strike price put is
lower than that of the higher strike price put.
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Example:
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Component
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Sell
ABC Mar $180 Put, receive $10 and buy ABC Mar $210
Put, pay $30
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Net
Premium
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Pay
$30-$10=$20
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Break-even
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$210-$20=$190
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Profit
when
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Stock
price is below $190
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Potential
Profit
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($210-$180)-$20=$10
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Potential
Loss
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$20
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Time
Value Impact
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Neutral
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