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Optimal Debit Spread Mechanics

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Here at tastytrade, we place a great deal of importance in the mechanics that lie at the core of our options trades. Strategy selection and timing are imperative, but the correct strategy and timing can result in less profits than desired if our mechanics are off.

Today’s study from the Research Team dives specifically into our favorite strategy for directional plays in low implied volatility environmentsthe debit spread. We know that debit spreads are made up of a long option near the stock price and a short option further away, but where should we be placing these strikes exactly?

The Study

Using the S&P 500, we formed debit spreads using delta requirements for the long and short options:

  • Long 70 Delta Put / Short 50 Delta Put
  • Long 60 Delta Put / Short 40 Delta Put
  • Long 30 Delta Put / Short 10 Delta Put
The Results

We looked specifically at a time where the S&P 500 sold off consistently to see which debit spread performed the best if the directional bias was correct. Our results showed that the debit spread consisting of a long in-the-money put and a short out-the-money put was the optimal setup.

Check out the segment above to see all the numbers behind optimal debit spread mechanics.

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