Call Debit Spreads Explained

Call Debit Spreads Explained | Coffee With Markus | Episode 58

Intro: 0:00
What's Happening In The Markets: 1:43
Viewer Comments & Questions: 10:19
What I'm Trading: 12:39
Option Spreads: 17:32
Deep Dive Q&A: 34:31
Q: Is a Vertical Spread the same as an Option Spread? 34:35
C: A normal Call is better for me. 34:57
Q: Would you buy and sell these as separate contracts, and also close them out separately? 36:30
Q: How does it work with the assignment? 39:03

I'm going to show you the good, the bad, and the ugly of call debit spreads!

Now...

There’s a ton of hype around option spreads as they become more and more popular.

I don’t personally think they’re ALWAYS good to trade, as some may have you believe.
But there are some instances where they’re a really good trading tool.

We’re going to discuss what Option Spreads are, why you should trade them, and when to trade them.

Then, we’ll look at some very specific examples of option spreads.

What’s the difference between buying a call, and a call debit spread?

Purchasing a call option means you have a limited downside risk (cost of the contract) and unlimited upside potential. Your break-even price is higher with a call option because you must factor in the cost of the option contract.

What is a call debit spread? It means you’re buying a call option at a lower strike price while selling a call option at a higher price. This is completed in a single transaction, known as a call debit spread.

Buying a call and selling a call at the same time reduces the overall capital needed to take on the position. The income that is generated for selling the higher call option is credited to the transaction. This will typically lower amount of capital at risk needed to take the position. This also results in a reduced break-even price, increasing the probability of the trade being profitable.

The only downside to a call debit spread is that it has limited upside potential. The upside potential to the trade is limited by the width of the spread or the cost of the premium.

Call debit spreads are very powerful tools, let's look at a detailed example.
By the way, If you didn’t know, I like to pick my options from the PowerX Optimizer.

If you’re not familiar with this revolutionary software, check it out HERE

For this example, we’re going to look at Bloomfield Energy (BE).

If I decide to purchase a $9 call option, the price would be $170. The upside to the trade is unlimited, and the risk of capital is limited to $170. The break-even price for this trade is $10.70.

If I decided to purchase a call debit spread, I would buy a $9 call and sell a $13 call. The capital required to buy this position is only $120 dollars, and the upside potential is $280. The break-even price for this trade is 10.20.

Buying a call debit spread reduces the overall cost of the trade, and lowers the break-even price. This means the stock only needs to move $1.20 and the trade will be profitable. This increases the likelihood of this trade being profitable!

Now you’re seeing the benefit of using a call debit spread!

This video is the first part of a series that will be discussing credit and debit spreads.

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Видео Call Debit Spreads Explained канала Markus Heitkoetter