Debit Spreads
Len Yates

Many traders are first attracted to options, and first use options, for directional trading. Directional trading is where the trader believes he knows which way a stock, index or future is going and opens an option position to take advantage of the expected move. More often than not, this option position is a simple call or put purchase. However, buying calls and puts is high-octane trading.
 
Directional traders have a lower octane alternative to simple call and put purchases -- debit spreads. All option traders should consider the benefits of spreading. A spread is constructed by buying an option and selling another option of the same type (call or put) on the same underlying. Usually the two options are of the same expiration month. (Such a spread is said to be a "vertical" spread because the options differ only by strike, and in the array of available options you picture the strikes running vertically.)
 
When the option bought is more expensive than the option sold, the spread is said to be a "debit" spread because its opening results in a net debit to your trading account. When the option sold is more expensive than the option bought, the spread is a "credit" spread. However, we will only be discussing debit spreads in this article.
 
How does a debit spread work, and why should you use it?
 
When you buy a debit spread you are essentially buying the difference, or spread, between the prices of two options. You are expecting that with the right market move that price difference will widen, resulting in a profit. 
 
A trader who buys a debit spread in calls expects the underlying to go up in price. As the underlying goes up both legs (options) of his spread will increase in price, but the option you bought, being closer-to-the-money, increases in price faster than the sold option, thus widening the spread. Conversely a trader buys a debit spread in puts when he expects the underlying to go down in price.
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