Debit Spread

One of the strategic tools that traders may use with options is to lower or eliminate their cost basis by using spread strategies, i.e., combining options of different strike prices on both the long and short sides.

For example, if one believes a stock at 40 will rise by over 5 points, the trader may want to go long the 35 call for the current month, which will have a premium of 5 intrinsic in the money points plus perhaps .75 of time value left, for a net 5.75 per contract. The trader can also sell the corresponding 45 call for an amount, say .85. As the trader thinks that the stock run in the remaining expiration month will only get to 45 maximum, the likelihood of the 45 expiring worthless is high, and the 35 call will ostensibly appreciate point for point with the underlying stock. The net price out of pocket per long contract for the trader on this kind of bullish spread would be 4.90, so this is referred to as a "debit spread."

The debit spread is not to be confused with the "deli spread," which may be deviled ham, chicken, or some other mystery combination at the downstairs cafeteria.