Spreads are a type of option strategy that involves the Buying and Selling of Calls (call spread) or Buying and selling of Puts (Put Spread). These strategies can be Bullish or Bearish.
If your overriding philosophy is a rise in the market, then you are playing a Bullish Strategy. If you Buy and Write call option contracts, if you are in a debit situation - Where you spent more money on the option purchased than the income received on the one you are selling, it is a debit spread and you are Bullish
Ex:
Buy 1 SFG JAN 40 CALL for $400 (bullish)
Sell 1 SFG JAN 50 CALL for $150 (bearish)
Because the Buy Call side is bullish and the investor paid out a higher premium for that side and is in a debit of - $250 from the premiums - this is a BULLISH CALL SPREAD.
By doing a little reversal, we can create a total opposite approach and philosophy.
Buy 1 SFG JAN 50 CALL for $150 (bullish)
Sell 1 SFG JAN 40 CALL for $400 (bearish)
Now the investor has a Credit of $250, so the profit will be if both options expire. The credit amount equals the maximum gain for the trader. In order for both options to expire, he would need the market to decline as call options lose value or expire if the market declines enough.
This is a credit bearish call spread.
A Put Spread is the same concept, except the Buy Side of the Spread would be bearish, since when you buy a put - you want the market to decline.
Buy 1 TRO DEC 70 PUT for $600
Sell 1 TRO DEC 60 PUT for $100
The above is a debit spread. The debit being -$500. It is a Bearish spread since the Buy Put has a higher premium. The higher cost side always dominates. The debit is also the maximum loss.
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