In the Money Debit Spreads - Good Idea?

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Which Vertical Option Spread Should You Use?

Understanding the features of the four basic types of vertical spreads—bull call, bear call, bull put, and bear put—is a great way to further your learning about relatively advanced options strategies. Yet to deploy these strategies effectively, you also need to develop an understanding of which option spread to use in a given trading environment or specific stock situation. First, let’s recap the main features of the four basic vertical spreads.

Basic Features of Vertical Spreads
Each vertical spread involves buying and writing puts or calls at different strike prices. Each spread has two legs: One leg is buying an option, and the other leg is writing an option.

This can result in the option position (containing two legs), giving the trader a credit or debit. A debit spread is when putting on the trade costs money. For example, one option costs $300, but the trader receives $100 from the other position. The net premium cost is a $200 debit.

If the situation were reversed—the trader receives $300 for putting on an option trade, and the other option costs $100—then the two option contracts combine for a net premium credit of $200.

Credit and Debit Spreads
Vertical spreads are used for two main reasons:

For debit spreads, to reduce the premium amount payable.
For credit spreads, to lower the option position’s risk.
Let’s evaluate the first point. Option premiums can be quite expensive when overall market volatility is elevated, or when a specific stock’s implied volatility is high. While a vertical spread caps the maximum gain that can be made from an option position, compared to the profit potential of a stand-alone call or put, it also substantially reduces the position’s cost.

Such spreads thus can be easily used during periods of elevated volatility, since the volatility on one leg of the spread will offset volatility on the other leg.

As far as credit spreads are concerned, they can greatly reduce the risk of writing options, since option writers take on significant risk to pocket a relatively small amount of option premium. One disastrous trade can wipe out positive results from many successful option trades. In fact, option writers are occasionally disparagingly referred to as individuals who stoop to collect pennies on the railway track. They happily do so—until a train comes along and runs them over.

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#DebitSpreads #InTheMoney #TradingOptions
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.

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[greywaver]

In your first example bull call spread, the potential profit of .45 ($45 per contract) was about a 9.9% return for the 44 days. ($45/$455 debit). This is an annualized return of around 80%+. I can live with 80%/yr. This assumes price remains above the higher strike price. Higher the delta, the better the "odds" of doing so. Thks!

[nicks]

Great video Jake. It seemed to me that in your example it would be better to sell the put spread (would receive $100 and risk $400) versus buying the call spread (would pay 415 to make $500) making the assumption that FB stayed above $340 until 17 September.

[TheMadMariner]

Good job on this, explaining the basic logic of these spreads. But for me personally, I'm looking for more information on how to decide which strategy is appropriate for a given stock at a given time.

[lmichaelhuang]

I've noticed for some symbols where there is less volume out of the money, I get better price spreads on itm debit spreads. That's why I put in orders for that. This was a useful sanity check.

[donvin]

Great work Jake! I opened an ITM bear call spread on AMD today. 20% of max profit by the end of day today.

[Anonymous-lwv]

assignment concerns will be a big factor in the decision whether you pick a put or call spread (inversely)

[richardvonmeyer]

You can create a debit spread using deep itm calls. It will have a higher probability of profit. To reduce the max possible risk, you can sell otm credit spreads (provided the distance in between it's legs isn't hugher than that of the debit spread's legs). You can even totally recover that max possible risk at some point after which, any otm credit spread with a similar width will have 0 risk.

[zadokmotorfreight]

Wow, very well done video! One if you buy an ITM spread, wouldn't the short option always be at risk of assignment since you want the ITM spread to stay ITM?

[Highlyskeptical]

My favorite tools learned here so far are the wheel, dead hand and credit spreads, the debit game seems too risky.
Thanks for explaining these financial tools, I'm overcoming my Dunning Kruger issues!

[AskDyor]

Great video!

Definitely one that’ll I’ll have to watch again!

[wmbrice]

Great content, Jake. Have you ever experimented with backtesting to “optimize” deltas for spreads?

[ohh_mendozuhh]

If i opened an ITM call debit spread, would I need to close out early? Or can I let it expire worthless?

[bikramnayak]

LOVE YOUR VIDEOS, SO CLEAR AND CRISP.

[vinceb]

Awesome video. Thank you for sharing your knowledge!

[passiveinvesting_automation]

I think I like OTM Put Credit Spreads more than ITM Debit Spreads because I can’t be exercised on my short positions in the PCS until that short strike is breached & the stock price for my short position is now in the money. However, with the call side I do feel like I am able to exit & get more of my profit sonnet compared to the PCS.

[matthewcrawley]

Loving the vertical spread videos. Vertical spreads and iron fly’s are my go to’s.

Any update on the Dead Hand?

[kanegs]

I like credit spreads, been bitten by them in the past, you have to watch the market. I'm not a big fan of the 'negative' risk ratio though with credit spreads (risk $4 to make $1). I'd prefer other strategies out there that provide 'positive' risk ratio (risk $1 to make $3 or $4)...debit spreads, butterflies, calendars, so on. Great video though, love it!

[richardcruz]

Can you please explain Deep In The Money Put Spreads pros and cons with Deltas in .80 to .90 spread.

[misaelarredondo]

3:45 “who the heck is buying in the money call contracts” me. I only buy in the money call contracts. Unless you do a leap I would never buy out of the money call contracts and honestly especially with a leap i would still go super deep in the money. What do you think Jake? Do most people buy OOTM? I’ve never understood why or is there an advantage besides being cheaper? What do you buy with leaps Jake?

[alfeim]

Also, ITM vertical spread, unlike the OTM counterpart, is theta positive.