The buying and selling of the same type of option contract creates a spread trading strategy. A call spread is buying and selling calls and a put strategy is going long and short on two contracts.
Debit Call
Spreads that are created when the premiums bought and sold results in a loss for the options trader is a debit spread. This would mean the investor needs the contracts to perform well to make the debit up. Debit spreads can be bullish or bearish.
Strategy Example
Buy 1 SWE Nov 40 Call for $300
Short 1 SWE Nov 50 Call for $100
These call options that were bought and sold resulted in a debit for this trader. The debit is $200. The options investor is looking for these contracts to become more valuable so they can be traded or exercised. The "spread" profit potential is in between the strike prices. When creating call debit strategies, the investor is bullish on the market. The market rising on this stock is what is needed for this trading position to be profitable going forward. The maximum loss is the $200 debit - should the contracts expire.
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