Debit Spread Explained 2025: How It Works, Examples & Credit Spread Comparison

Understanding Debit Spreads in Options Trading

A debit spread is a popular options trading strategy where an investor simultaneously buys and sells options of the same type but with different strike prices, resulting in a net cash outflow or 'debit' from the trader’s account. This method is widely used to manage risk while aiming for potential profits in volatile markets.

What Is a Debit Spread?

In essence, a debit spread involves purchasing a more expensive option and selling a cheaper option within the same class (calls or puts) but at different strike prices. The net effect is a debit to the trader’s account because the cost of the bought option exceeds the premium received from the sold option. This upfront payment is the initial investment to establish the position.

Key Points to Remember

• Debit spreads combine buying and selling options simultaneously within the same class.
• They result in a net cash outflow, meaning the trader pays to enter the trade.
• Although some spreads use multiple options, the fundamental concept remains consistent.

How Does a Debit Spread Work?

Typically, debit spreads involve buying an option with a certain strike price while selling another option with a different strike price on the same underlying asset, both expiring at the same time. The goal is to capitalize on favorable price movements while limiting potential losses. If the premium paid for the purchased options is greater than the premium received from the sold options, the trader experiences a net debit.

This contrasts with credit spreads, where the trader receives a net premium upfront because the sold options’ value exceeds that of the purchased options.

Example of a Debit Spread in Action

Imagine a trader buys a call option for $2.65 and simultaneously sells another call option on the same stock with a higher strike price for $2.50. This creates a bull call spread with a net debit of $0.15, or $15 per contract (since one option contract typically represents 100 shares).

The trader expects the stock price to rise moderately, increasing the value of the purchased call option. Maximum profit occurs if the stock price finishes at or above the higher strike price at expiration, while losses are limited to the initial debit paid.

Similarly, a bear put spread involves buying a put option with a higher strike price and selling one with a lower strike price, also resulting in a net debit.

In contrast, bear call spreads and bull put spreads are credit spreads, generating a net credit at initiation.

Calculating Profit and Breakeven Points

For bullish debit spreads (call spreads), the breakeven price equals the lower strike price plus the net debit paid. For bearish debit spreads (put spreads), it is the higher strike price minus the net debit.

For example, if a trader buys a $60 call and sells a $70 call with a net debit of $6, the breakeven price would be $66 ($60 + $6). The maximum profit, $4 per share or $400 per contract, occurs if the stock price closes at or above $70 at expiration. The maximum loss is limited to the initial $6 debit.

Debit spreads provide a strategic way to balance risk and reward by capping potential losses while allowing for profit opportunities based on the underlying asset’s price movements.

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