Debit Put Spread

A debit put spread is a vertical spread where the investor purchases the higher strike put and sells the lower strike put. This is a debit spread since the long higher strike put will have a higher premium than the short lower strike put. The maximum profit is the difference in strike prices minus the premium earned, and is attained if the stock closes below the lower strike. Therefore, tthis strategy should be employed when the investor is bearish on the underlying. The maximum risk is the net premium paid. The breakeven is Long strike - premium.

Example: Revisiting the long call example, with XYZ stock trading or $34 per share, our investor purchases the $35 put for $1.85. She then sells the $32.50 call for $.65. This reduces the risk to $1.20. The breakeven is $33.80. However, the maximum value of the position is now $250, since the short option loses $1 for every dollar the long position gains falls below $34.