a spread refers to a strategy in which an investor simultaneously buys and sells options on the same underlying asset. There are two main types of option spreads: debit spreads and credit spreads.
A debit spread is a spread in which the investor pays a net premium to enter the position. This means that the investor pays more for the option they are buying than they receive for the option they are selling. The potential payout of a debit spread is limited to the difference between the strike prices of the options, minus the net premium paid.
A credit spread is a spread in which the investor receives a net premium to enter the position. This means that the investor receives more for the option they are selling than they pay for the option they are buying. The potential payout of a credit spread is limited to the difference between the strike prices of the options, plus the net premium received.
The payouts of debit and credit spreads are calculated differently, depending on whether the underlying asset price increases or decreases. In general, debit spreads have limited upside potential and unlimited downside potential, while credit spreads have limited downside potential and unlimited upside potential.
public static (double, double) CreditAndDebitSpreadPayout(
double underlyingPrice, // Current price of the underlying asset
double longOptionStrikePrice, // Strike price of the long option
double shortOptionStrikePrice, // Strike price of the short option
double optionPremium // Premium received/paid for the options
double longPositionShares // Number of shares held in the long position
)
{
// Calculate the potential payout of the long option
double longOptionPayout = (longOptionStrikePrice - underlyingPrice) * longPositionShares;
// Calculate the potential payout of the short option
double shortOptionPayout = (underlyingPrice - shortOptionStrikePrice) * longPositionShares;
// Calculate the net premium received/paid for the options
double netPremium = optionPremium * longPositionShares;
// Calculate the payout of the bull call spread
double bullCallSpreadPayout = longOptionPayout - shortOptionPayout - netPremium;
// Calculate the payout of the bear put spread
double bearPutSpreadPayout = longOptionPayout - shortOptionPayout + netPremium;
// Return the payouts of the bull call spread and bear put spread
return (bullCallSpreadPayout, bearPutSpreadPayout);
}
This function calculates the payouts of a bull call spread and a bear put spread by subtracting the potential payout of the short option from the potential payout of the long option, and adding or subtracting the net premium received/paid for the options.