← IntermediateLesson 9 · 4:32
Debit or credit spread?
Summary
You can tell a debit spread, which you pay to open, from a credit spread, which pays you to open, and build the same view both ways. You can find the three numbers on any spread (the most you can make, the most you can lose and the break-even) and choose between them by how each handles your cash.
Key terms
- debit spread
- A spread you pay to open.
- credit spread
- A spread that pays you to open it.
- maximum gain
- The most a trade can make; on a vertical spread it plus the maximum loss equals the strike gap.
- maximum loss
- The most a trade can lose; for an option you buy, it is the premium you paid.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
Check yourself
Answer each question to see why the right answer is right.
1. What is the difference between a debit spread and a credit spread?
2. You sell the $110 XYZ put for $10.57 and buy the $100 put for $3.41. What do you collect, and what is the most you can lose?
3. The call debit spread ($100/$110) and the put credit spread ($110/$100) on XYZ: where does each break even?
4. Why do the most you can lose and the most you can make on these spreads always add up to $1,000?
5. With the credit spread, $716 arrives in your account. How much of your own money is at risk?
Finished the video and the quiz? .