Debit Spreads
What It Is
A debit spread is an options strategy where the premium paid for one option is greater than the premium received from selling another, resulting in a net debit.
Why It Matters
It provides directional exposure with limited risk and lower cost than buying a single option outright.
How It Works
- Buy a higher‑premium option
- Sell a lower‑premium option
- Net result is a debit
- Profit if price moves favorably toward the long option
Key Components
- Defined risk
- Lower cost than naked options
- Directional bias
- Limited reward
Example
Buying a $50 call and selling a $55 call creates a bull call debit spread.
Key Takeaways
- Debit spreads reduce cost.
- They offer controlled directional exposure.
- Maximum loss is the initial debit.