Hi AstroGuru,
Good strategies get started with Options Strategies.
Debit spread is where you will have to pay a certain amount to enter into the strategy. Example:
you are bullish and believe the market will go up, you can buy 8000CE and sell 8100CE;
8000CE will cost you Rs.100
8100CE will bring you Rs.58
hence, the net debit from your account will be Rs.42. This is the maximum you can lose in this trade.
And, if market goes beyond 8100 or closes at 8100 at expiry, you will make Rs.100.
you can enter debit spread using PUT options as well if you are bearish.
Debit spread is a safer way to have limited risk and limited profit.
In debit spread, you BUY option that is close and SELL option that is further away, be it calls or puts.
In Credit Spread, you SELL closer option strike and BUY further away strike.
Example, you are bullish:
using PUT options, you can put on a Credit spread to take advantage of your view.
SELL 7900PE for Rs78
BUY 7800PE for Rs.49.
net credit you will receive is rs. 29.
this is the MAXIMUM profit you will earn. this is credit on day one of your trade.
If market falls and nifty closes at or below 7800, your loss will be Rs.100.