Learn the best way to trade debit spreads – its a great trade for beginner option traders. Lots of tricks in the article so read carefully.
If you are a new entrant in the options world – a beginner – then you must know one trade and that is the debit spreads.
Note: If you do not know what a debit spread strategy is please read Call Debit Spread. In this post I will only explain how you can trade debit spreads in a better way.
Debit spreads can be traded both sides. Lets discuss:
- When you feel the stock may move up you can trade Bull Call Debit Spread: Here you buy ATM (At The Money) Call options and sell OTM (Out of The Money) call options to reduce the cost of buying calls.
- When you feel the stock may go down you can trade the Bear Put Debit Spread: Here you buy ATM (At The Money) Puts and sell OTM (Out of The Money) Puts to reduce the cost of buying puts.
Loss in both the above case is restricted to the premium paid minus premium received. That is your final net debit. Can you see how its much better a trade than simply buying options? Here either your option buy win or your option sell wins or both win and you can end up making even more than a naked option buyer.