Debit Spreads

Debit spreads allow you to profit from what a stock is not going to do. They are similar to credit spreads but work in a different way.

When you enter this spread you sell an in the money option and buy a deeper in the money option on the same stock. For example say you sell the $50 call on stock XYZ for $8 and buy the $45 call for $12.

Max Gain

The most you could make from this trade is the difference between the two strike prices minus the amount you paid. In this example it cost us $4 to enter the trade ($12-$8) and the difference between the strike prices is $5. So our max gain would be $1.

We would keep our max gain as long as the stock stayed above the strike price we sold, in this case $50.

Max Loss

The most we could possibly lose on a trade like this is the initial cost. In the above example spend $4 to enter the trade. If the stock falls below $45 the option we bought both options will expire worthless, in which case we would lose the $4.