A debit spread is an options strategy where you pay money upfront (a "debit") to open the trade. It is the opposite of a credit spread where you receive money. Debit spreads let you take directional bets with defined risk and reduced cost.
What is a Debit Spread?
A debit spread involves buying one option and selling another option at a different strike price, both with the same expiration. You pay a net debit to enter the trade.
Simple version: You are buying an option but reducing the cost by selling a cheaper option against it. Your profit is capped, but so is your risk.
Types of Debit Spreads
Bull Call Spread (Call Debit Spread)
Use when you are bullish. You buy a call at a lower strike and sell a call at a higher strike.
Example
Stock is at $100. You are bullish.
- Buy $100 call for $4.00
- Sell $105 call for $2.00
- Net debit: $2.00 ($200 per contract)
Max profit: $3.00 ($300) if stock is above $105 at expiration
Max loss: $2.00 ($200) if stock is below $100 at expiration
Bear Put Spread (Put Debit Spread)
Use when you are bearish. You buy a put at a higher strike and sell a put at a lower strike.
Example
Stock is at $100. You are bearish.
- Buy $100 put for $4.00
- Sell $95 put for $2.00
- Net debit: $2.00 ($200 per contract)
Max profit: $3.00 ($300) if stock is below $95 at expiration
Max loss: $2.00 ($200) if stock is above $100 at expiration
Why Use Debit Spreads?
- Lower cost: Cheaper than buying a single option outright
- Defined risk: You know your maximum loss upfront
- Reduced breakeven: You need less movement to be profitable
- Less affected by IV: The short option offsets some volatility risk
Debit Spread vs Credit Spread
- Debit spread: You pay to enter, profit if stock moves in your direction
- Credit spread: You receive money to enter, profit if stock stays in a range
- Debit spreads: Need the stock to move, time works against you
- Credit spreads: Can profit from no movement, time works for you
When to Use Debit Spreads
- You have a directional opinion on the stock
- You want to limit your risk compared to buying options outright
- Implied volatility is relatively low (options are cheap)
- You expect a move within a certain range, not an unlimited move
Tips for Trading Debit Spreads
- Give yourself enough time - at least 30 to 45 days until expiration
- Choose strike widths that match your risk tolerance
- Close the trade when you have captured 50% to 75% of max profit
- Do not hold through expiration if possible
Track Your Spread Trades
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Summary
Debit spreads are directional trades where you pay to enter. They cost less than buying options outright and have defined risk. Use bull call spreads for bullish bets and bear put spreads for bearish bets. They work best when you expect a moderate move in your direction.
Learn about the opposite strategy: credit spreads.