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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Strategy
Beginner, Speculation
Call Debit Spread
A strategy of buying and writing call options on the same underlying and expiration, when you pay a net premium.
Detail
A Call Debit Spread is a directional option strategy in which a trader buys a call option at a lower strike price and simultaneously sells another call option at a higher strike, both with the same expiration.
It is used when the trader expects the underlying asset to rise moderately. The position requires a net debit to open, hence the name. The maximum profit is limited to the difference between the strikes minus the net premium paid. Maximum loss is the premium paid if the underlying stays below the long call strike.
The Call Debit Spread (also known as a Bull Call Spread) is a defined-risk strategy used to profit from a moderate increase in the price of the underlying.
The long call gives the right to buy the stock at a lower strike, while the short call offsets some of the cost by collecting premium – but also caps the potential upside.
The strategy performs best if the underlying price rises to or above the short call strike at expiration.
Unlike buying a naked call, this spread lowers cost and breakeven but also limits profit. It is suitable when the trader is confident in direction but wants to limit risk and reduce capital usage.
Optimal conditions
Best used in bullish or moderately bullish markets.
Ideal when implied volatility is low to moderate, and the trader expects a steady upward move.
Works well before earnings or after pullbacks when limited risk is preferred.
Max profit
Limited to the difference between strikes minus the net debit paid.
Max loss
Limited to the premium paid to enter the trade.
Risks
The primary risk is that the underlying does not move as expected.
If the price stays below the long call strike, the entire premium may be lost.
Profit is capped, so the trade can underperform if the move is stronger than anticipated.
Greeks
Delta: Positive – increases with upward movement.
Theta: Slightly negative – long call decays faster than short call gains.
Vega: Mildly positive – increasing IV benefits the long call.
Gamma: Positive – strongest near breakeven and short strike.
Variations
Bull Call Spread (for growth), Bear Put Spread (for decline), Diagonal Spread (variant with different expiration).
Usage example
You expect stock XYZ (currently at $95) to rise to around $105.
You buy 1x call at strike 95 for $4 and sell 1x call at strike 105 for $1.
Net debit = $3.
If the stock expires at $105 or higher, you make $10 – $3 = $7 profit.
If the stock stays below $95, you lose the entire premium.
DTE
Typically 30-60 days, but can be adjusted to the business goal.
IV (implied volatility)
It is advisable to enter at a lower IV, as IV growth helps the spread value.
Premium
Debit (payment of premium for entering the position).
Margin
Only the premium paid is at risk. Defined-risk trade, no margin required beyond the debit.
Notes
This is one of the most popular bullish vertical spreads.
Cheaper than buying a single call, with better risk/reward.
Suitable for smaller accounts and directional setups.
Can be rolled to higher strikes if the move continues.
Tags
call debit spread, option strategy, bull call spread, speculation, option premium, limited risk, limited profit
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