5.3.3 Spreads
Whereas straddles and combinations combine the use of calls and puts, spreads are the use of two or more options of the same type.
A call spread is the purchase and sale of call options at a different strike price. If you buy a call with a lower strike price than the strike price of the call you write, it is called a long call spread, or a bull call spread. Remember that for call spreads, you are bullish if you are long the lower strike price. You can remember this because the word BULL has two Ls for Long Lower. If the call you write has the lower strike price, it is called a short call spread, or alternatively, a bear call spread.
A put spread is the purchase and sale of put options at a different strike price. If the put you buy has a higher strike price than the put you write, it is called a long put spread or a bear put spread. With a short put spread or bull put spread, the put you buy will have the lower strike price, and you will profit by a rise in price that puts your position in the money.
Debit and credit spreads. For spreads, whenever the option purchased has a higher premium than the option sold, the investor’s spread account will have a net debit, and the spread will be called a debit spread. This is called a debit spread because the investor is spending more money than he receives, meaning the premium he paid is higher than the premium he took in. For debit spreads, the investor’s maximum loss is the net amount of money the investor has paid in premiums.
In contrast, a credit spread is a spread where the written option has the higher premium. This is called a credit spread