Put spreads are not too different from call spreads but it is crucial to distinguish between ITM and OTM for each. Remember: For puts, ITM is above the current price, OTM is below the current price. For calls, ITM is below the current price and OTM is above the current price.
A vertical put debit spread is the simultaneous purchase of an ITM put and sale of an OTM put. The vertical put debit spread is similar to the vertical call credit spread.
Vertical Call Credit Spread: Sale of an ITM call (lower than current price) and Purchase of OTM call (greater than current price)
Vertical Put Debit Spread: Sale of an ITM put (greater than current price) and Purchase of an OTM put (lower than current price)
Let's analyze the graphs for the vertical put debit spread:
(Will find better image)
As its alternate name implies, vertical put debit spreads are bearish, as you maximize your profit when the stock's price is ITM (or lower than the original market price).
Profit: The maximum profit is equal to the difference between the original ITM and OTM strike prices and the premium collected.
Loss: The loss is capped at the amount paid for the OTM put premium.
Earlier, I mentioned the similarities between the vertical call credit spread and vertical put debit spread. If you look back to the vertical call credit spread, the similarity is much more clearer, as the graphs form the same shape!
Eighteen-year old trader, future connoisseur of options.
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