Net debit refers to the net amount paid to initiate a trade. Let us consider an example where a trader executes a bull call spread. A bull call spread involves the buying of lower strike calls and simultaneously selling an equal number of higher strike calls with the same expiration date. Since the total option premium of the lower strike calls is more than the option premium for the higher strike calls, the trade results in a net outflow of cash from the trader’s account.
A clearer example would be:
- The trader buys a July 30 call at $2.50
- And simultaneously sells a July 35 call at $1
By doing so, a net outflow results. This net cash outflow is calculated as:
($2.50 – $1) x 100 =$150
Since the trader pays $250 for the long call and collects $100, a net debit or cash outflow results. This has to be funded from the traders trading account.
Strategies which result in net debit
- Long call
- Long put
- Bull call spread
- Bear put spread
- Long straddle
- Long strangle
- Long synthetic straddle
- Ratio call spread. A ratio call spread can result in either a net debit or net credit.
- Ratio put spread. A ratio put spread can result in either a net credit or a net debit.
- Call ratio spread. A call ratio spread can result in either a net credit or a net debit.
- Put ratio backspread. A put ratio backspread can result in either a net debit or a net credit.
- Long butterfly
- Long condor
- Calendar spread
- Diagonal spread
- Collar spread. A collar spread can result in either a net debit or a net credit.