Unit 1 · Level 2 · Vertical spreads
Debit spreads
Stock at €100. You buy the €100 call for €5 and sell the €110 call for €2, both the same expiry. Net cost: €3 per share, the 'debit'. That €3 is the most you can ever lose. If the stock closes at €110 or higher, the spread is worth its full €10 width, and you keep €10 − €3 = €7. You paid €3 to maybe make €7. That's the whole machine.
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What you get asked
Put the construction of a bull call spread in order
Lower strike bought, higher strike sold, one expiry. Everything about the trade (cost, cap, breakeven) is fixed the moment you open it.
You buy the €50 call for €4 and sell the €60 call for €1, same expiry. Strike width is €10, net debit €3. What is your maximum profit per share, in €?
Max profit = width − debit = €10 − €3 = €7 per share. The spread can never be worth more than the distance between its strikes.
What is the maximum loss on a debit spread?
Your long leg always covers your short leg, so the worst case is both legs expiring worthless. You lose exactly what you paid.
Max profit of a debit spread = strike width minus the ___ paid.
Width − debit. If those two numbers are too close together, you're paying nearly the full width for very little possible reward.
When does a bull call spread deliver its full maximum profit?
Above the short strike, both calls move euro-for-euro and the spread is worth its full width. Beyond that point, extra rally is profit you already sold. 🐜
The rest of this unit
Trade some upside for a hard ceiling on loss. It's the spread trader's first tool.