Series 7: 5.3.3.3 Debit Put Spread

5.3.3.3  Debit Put Spread

With a debit put spread, also called a bear put spread, or a long put spread, you buy a long put with a higher strike price and write a short put with a lower strike price. You do this because you expect the stock to drop, but not significantly. Consider the following spread:

Long ABC July 55 put @ 5

Short ABC July 45 put @ 1

This is a debit spread because you have spent more in premiums to acquire the position ($5) than you have received ($1). The premium you pay totals $4 ($5 – $1). Your maximum loss is the premium paid, or $400. Your maximum gain occurs when the strike price drops to $45. At this point, your net gain is $600. This is calculated by ta