Vertical Options Spreads

There are two types of vertical spreads — debit and credit. The labels refer to the effect of structure of the spread in terms of whether it generates a net credit in your account when established, or a net debit.

Given an underlying stock price at 120, for example, a put option with a strike price of 105 has a higher price compared with the premium on the farther out-of-the-money option with a strike price of 95 (which has a price lower in value).

Selling the 105 and buying the 95 (tte farther out of the money) creates a net credit (a vertical put credit spread). Doing the reverse, selling the 95 and buying the 105, creates a net debit in your account (hence vertical put debit spread).

-John Summa, PhD

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