Skip to main content

Debit Spreads explained

 In this post I will be explaining Debit Spreads which are a relatively risk free way to make profit. This is especially a good strategy for small accounts. 

There are two types of debit spreads, Call Debit Spread which is a bullish strategy and Put Debit Spread which is a bearish strategy.

Call Debit Spread

Let's take a look at a Call Debit Spread I have open on CCIV (Lucid Motors) stock. 


How did I open this Call Debit Spread ? 

I opened this spread by buying the $30 Call option and simultaneously selling $30.5 Call option. 


How much did it cost ?

$30 Call option was priced at $3.12 and $30.5 Call option was priced at $2.84. Since I bought $30 Call, I had to debit $312 and similarly I got a credit of $284 for selling $30.5 Call. This resulted in a net debit of $28. I bought a total of 20 contracts which cost me 20*$28 = $560.

What about the profit ? 

You can calculate the profit with the difference between the strike prices of the two call options. In this case it is $0.50 * 100 = $50 per contract. And we have 20 contracts which would result in a profit of $100. 

Risk/Reward Analysis

This means that I am risking $560 for a total gain of $1000. Net profit of $440 which is a 78% gain. I am going to realize this gain only if CCIV closes above $30.5 on 03/19/2021.

Put Debit Spread

You would open a PDS when you are sure that a stock wouldn't close above a certain price on an expiration date. In short you have a bearish to neutral outlook on the stock. You can accomplish this by buying a put a strike price and selling a put at a lower strike price. An example is given below.

You can get a profit of $100 per contract if CCIV closes below $30.5 in the above PDS.

Labels

Labels:
Location: Seattle, WA, USA

Comments

Post a Comment

Popular posts from this blog

The beginning of my Robinhood journey

 So here's the plan I'm going to document my weekly progress with Robinhood. My primary way to do this is going to be Put Debit Spreads, Call Debit Spreads, Naked Calls and Puts, the latter sparingly used. I'll also do my best to deposit $5000 on the 1st of each month. I bought 2 Call Debit Spreads this week. Let's see how they do.      SPY CDS expiring tomorrow. If SPY closes above $391 then I get $300. I risked $285 for $300.     Lucid Motors CDS which went public through CCIV SPAC is expiring this Friday. If the price of CCIV is above $30.5 at close on Friday, then I get $1000. So this means that I'm risking $560 to gain $1000 which is 44% return. Pretty sweet.  I'll also be posting daily/weekly updates. 
Post a Comment
Read more

Fed to keep near zero interest rates till 2023 to boost recovery, forecasting a bullish outlook in the near team.

 Jerome Powell gave an  update  today on the Federal Reserve's position on the interest rates for the foreseeable future. The forecast of near zero rates till 2023 calmed the nerves of investors and led to a sharp drop in the market volatility index VIX (source: yahoo finance ) Tech stocks look to bounce in the coming weeks in light of this news. 
Post a Comment
Read more