Debit Spread Options Strategy with SJ Options Mentoring

Debit Spread Options Strategy

In this excerpt from our options mentoring course, David gives us some insight on understanding the Debit Spread option strategy.

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Debit Spread Options Strategy with Mentoring

Video Transcript

Nine out of ten, you make the most money and you want the underlying to go to your short strike. During any type of spread, whatever strike you’ve sold in this scenario, it’s the 880, that is where you’re going to make the most money at the strike you sold. Obviously, your breakeven right here is going to be the long strike plus your initial cost of the spread. So your long strike was the 860, we paid 854 this, so about 860-850. And we can see that here where my pointer is at the breakeven line. It’s about 860, 850. Everybody see that?

Again, I say this all the time, I’m not showing you this because this is a great trade. It may or may not be. I’m showing you this just for the mechanics of the call debit spread. What other kind of spreads can we buy a put spread if we want to take advantage of the downside? On the right side of the Think or Swim platform are the puts. And so we go a little bit out of the money, and by out of the money I mean, for puts, a strike price lower than the current price of the Russell. We would come down maybe the 840 and buy it. Sure enough, it’s about $1,800. We go 20 points lower and this is also the point of discussion. By the end of November, could the Russell be at 820? Sure. Could it be at 800? Sure. Could it be at 780?

A lot of times, when markets explode where the other, a lot of times it’s in the other direction. With this situation, you could go down as little or as far as you want. If you pick one that’s closer to your loan then you’re not going to pay as much for it and you might not make as much but it doesn’t have to move quite as much as if you went further away. As you go further away on the downside, you’ll see that the put that you’re using to finance your trade you’re getting less and less for it. You’re actually going to put up more money at the front of the trade. It’s kind of a high conviction pack trade if you really thought that the market was soft.

I got to tell you, in the past month or two, I thought that the market is going to pull back and it certainly still hasn’t greatly. It’s kind of an all or nothing type trade where, let’s say, we’re at the 840, let’s go down 50 points and we’ll hold the control key down and we’ll sell the 790. We’ll take a look at what this looks like. We’ll go ahead and uncheck all those and just check our vertical. Here we are at 850…