Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction. For example, assume that there is a investor holding a call option who sells it for $2.50. Immediately following this sale, the investor buys another call option on the same underlying security for $2.65. The debit spread is $0.15, which results in a loss of $15 ($0.15 * 100).
Although there is an initial loss on the transaction, the investor is betting that there will be a significant change in the price of the underlying security, making the purchased option more valuable in the future.
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