Bullish Debit Spread

A Bullish Debit Spread Options Strategy refers to buying an At The Money or In The Money Call Option and then selling a call that is Out Of The Money. The Short side limits the maximum loss, but also caps the maximum profit as well. The spread is the differential between the purchase price of the Long option and the sale price of the Short option. Since the Long option is more In The Money (and therefore expensive) a debit is required to create the position.

Bullish debit Spreads are directional option strategies because they rely on the price action moving upward in order to generate a profit.




See the Profit & Loss diagram of the Bullish Debit Spread Spread strategy at OptionCreator

Example

XYZ is currently trading at $200

Long 1 x In The Money $190 Call for 10.86 = ($1086) debit
Short 1 x Out Of The Money $210 Call for 1.032 = $103 credit

Net debit = (-$983)

All options expire with XYZ at $210

Long 1 x In The Money $190 Call is worth 20 = $2,000
Short 1 x Out Of The Money $210 Call is worthless = ($0)

Profit = $2,000 minus (-$983) debit = $1017

All options expire with XYZ still at $200

Long 1 x In The Money $190 Call is worth 10 = $1,000
Short 1 x Out Of The Money $210 Call is worthless = ($0)

Break even = $1,000 minus (-$983) debit = (-$17)

All options expire with XYZ at $190

Long 1 x In The Money $190 Call is worthless = ($0)
Short 1 x Out Of The Money $210 Call is worthless = ($0)

Loss = (-$983) debit required to open trade.