Option Strategies

Know More: Securities-generally 2.0, Securities-generally

The following is provided for informational purposes, and not meant to be legal advice.

How do option holders make a profit? They make money from debit and credit spreads. A spread occurs when an investor pays a premium for an option purchased and receives a premium for an option sold. The spread between premiums may never grow wider than the difference between the strike price of options. At the narrowest point, both options expire worthless.

A debit spread occurs when an option purchased costs more than the premium received from an option sold. The option investor buys the option with a high premium and sells the option with a low premium.

A credit spread occurs when an option sold generates the premium that’s greater than the cost of the option purchased. The investor buys the option with a low premium and sells the option with a high premium.
A call debit spread occurs when an investor buys a call with a lower strike price and writes a call with a higher strike price.

A net debit occurs when a call purchased will have a higher premium than a call written. To be bullish, the increase in the underlying stock causes an increase in the call premium. The investor profits when the spread between the premiums widen. The investor loses when the spread narrows.

A call credit spread occurs when an investor buys a call with a higher strike price and writes a call with a lower strike price.

A net credit occurs when a call purchased has a lower premium than the call written. To be bearish, the decrease in the underlying stock causes the call premiums to decrease and the spread to narrow. The investor profits when the spread between premiums narrow. The investor loses when the spread widens.

A put debit spread occurs when an investor buys a put with a higher strike price and writes the put with a lower strike price. To be bearish, the decrease in the underlying stock causes the increase in put premiums. The investor profits when the spread between the premiums widen.

A put credit spread occurs when an investor buy a put with a lower strike price and writes a put with a higher strike price. To be bullish, the put premiums decrease when the underlying stock increases. The investor profits when the spread between premiums narrow.

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