debit spread

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Debit spread

Applies to derivative products. Difference in the value of two options, when the value of the option bought exceeds the value of the one sold. One buys a "debit spread." Antithesis of a credit spread.

Debit Spread

An option strategy in which one buys an option for a higher premium and sells another option on the same underlying asset at a lower premium. One profits from a debit spread when there is a large change in the price of the underlying asset that will increase the value of the option with the higher premium; the option with the lower premium hedges the investor's risk.

debit spread

The simultaneous sale of one option and purchase of another option that results in a debit to the investor's account. Thus, more funds are required for the purchase than are received from the sale. An example is the purchase of a 6-month call at a price of $500 and the simultaneous sale of a 3-month call at the same strike price for $300. This trade results in a debit of $200 plus commissions to the investor's account. Compare credit spread.
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Switching to Direct Debit spreads costs, keeps budgets simple and saves time.
In simple and down-to-earth language, Kraft explains a variety of strategies including buying and selling options; covered call writing; collars; using closed end mutual funds for income; debit spreads, volatility-based straddles; ratio backspreads; condors; and calendar spreads.
Debit spreads are not as volatile as buying options, which works both ways.
Debit Spread to Buy -- Buy Merrill Lynch (NYSE: MER) Jan 2007 60 Call and sell MER Jan 2007 65 Call.
The most successful debit spreads were Qwest (NYSE:Q) and Cendant (NYSE:CD).
Debit Spread to Buy -- Buy Viacom (NYSE:VIAB) Jan 35 Call sell VIA/B Jan 40 Call.
The spin-off is scheduled to be completed in the first quarter of 2006, after this debit spread expires.
LEAP Debit Spread to Buy -- Buy General Electric (NYSE:GE) Jan 2007 35 Call and sell GE Jan 2007 40 Call.