Call Debit Spread Options Strategy Explained
A call debit spread, also known as a bull call spread or a long call spread, is a bullish options trading strategy with limited downside and upside potential.
What is a Call Debit Spread (Bull Call Debit Spread)
The call debit spread strategy involves buying a call option and selling another call option with a higher strike price and the same expiration date
It is used to speculate on a stock moving up in the short term and to lower your break-even cost compared to buying a naked call. This trade results in a net debit, meaning you pay more than you receive. A call debit spread is also known as a bull call spread.
Call Debit Spread Example
Let’s say you believe that XYZ stock, currently trading at $50, will increase in price over the next month. You could buy a $50 call option for $3 and sell a $55 call option for $1, resulting in a net debit of $2.
If XYZ stock rises to $60 at expiration, your $50 call option would be worth $10, while your $55 call option would be worth $5. Your net profit would be $3 ($10 - $5 - $2 initial net debit).
Call Debit Spread Risk Diagram
Call Debit Spread Max Profit & Loss
The maximum profit for a call debit spread is equal to the width of the strike prices of the two options minus the net debit paid to enter the trade. In our example, the maximum profit would be $3 ($55 - $50 - $2 initial net debit).
The maximum loss for a call debit spread is limited to the net debit paid to enter the trade. In our example, the maximum loss would be $2.
Call Debit Spread Breakeven Price
The breakeven price for a call debit spread is the lower strike price plus the net debit paid to enter the trade. In our example, the breakeven price would be $52 ($50 + $2 initial net debit).
Call Debit Spread and Theta
Theta measures the rate at which an option’s value decreases over time. Since a call debit spread involves buying a call and selling a less expensive one, theta hurts the overall position.
The theta of the purchased option is greater than the theta of the sold option, so the overall position will have negative theta, meaning its value will decrease over time. Additionally, call credit spreads benefit from a rise in implied volatility since you are net long options.
Call Debit Spread vs. Put Credit Spread
A put credit spread is similar to a call debit spread in the sense they are both bullish. However, a put credit spread results in a net credit, meaning you receive more than you pay.
On the other hand, you pay a debit when opening a bull call spread. Therefore, the main difference is whether you want your bullish play to be a credit or a debit.
FAQ
Q: How do you make money on a call debit spread?
A: You can make money on a call debit spread if the underlying stock rises in price above the breakeven point.
Q: What is the difference between call debit spread and put debit spread?
A: A call debit spread is a bullish options trade involving buying a call option and selling another with a higher strike price and the same expiration date. On the other hand, a put debit spread is a bearish options trade that involves buying a put option and selling another put option with a lower strike price and the same expiration date.
Q: How much can you lose on a call debit spread?
A: The maximum loss for a call debit spread is limited to the net debit paid to enter the trade.
Q: What happens if a call debit spread expires in-the-money?
A: If both options in a call debit spread expire in-the-money, they will both be automatically exercised, resulting in the purchase of 100 shares of stock at the lower strike price and the sale of 100 shares at the higher strike price. The net result would be the maximum profit for the trade.
Q: What is the max profit on a debit spread?
A: The maximum profit for a call or put debit spread is the difference between the strike prices of the two options minus the net debit paid to enter the trade.
Q: Is a call debit spread bullish or bearish?
A: A call debit spread is a bullish options trade used to speculate on a stock moving up in price in the short term.
