A debit spread in plain words
A debit spread is an options strategy with two legs. You buy one option and sell another of the same type and expiration but at a different strike price. You pay more for the option you buy than you collect for the one you sell, so you pay a net cost up front. That net cost is called the debit.
The debit is also the most you can lose on the trade, which is why it is called a defined-risk strategy.
The two common versions
A bull call spread buys a call at a lower strike and sells a call at a higher strike. It profits if the stock rises. A bear put spread buys a put at a higher strike and sells a put at a lower strike. It profits if the stock falls.
A simple example
A stock trades at $100. You buy a $100 call for $4.00 and sell a $110 call for $1.50. The net debit is $2.50 per share, or $250 per contract of 100 shares.
Your most you can lose is that $250, if the stock finishes at or below $100. Your most you can make is the $10 gap between the strikes minus the $2.50 you paid, which is $7.50 per share or $750, if the stock finishes at or above $110. The break-even price is $102.50. These are made-up numbers before commissions.
The trade-offs
Compared with buying the $100 call alone for $4.00, the spread costs less and is less hurt by falling implied volatility and by time passing. The price you pay for that is capped profit: the sold call means you give up gains above $110.
Commissions and bid-ask spreads apply to both legs. The short leg can also be assigned early on American-style options. Signal Desk's Options tab can build these spreads with live quotes and chart their payoff.
Debit Spread FAQ
What is a debit spread?
It is an options strategy where you buy one option and sell another of the same type and expiration at a different strike, paying a net cost up front.
What is the maximum loss and profit on a debit spread?
The maximum loss is the net debit you paid. The maximum profit is the distance between the two strikes minus that debit.
How is a debit spread different from a credit spread?
In a debit spread you pay money up front. In a credit spread you receive money up front and your risk is the distance between the strikes minus that credit.
Is a debit spread bullish or bearish?
Either. A bull call spread expects the stock to rise and a bear put spread expects it to fall.
Why use a debit spread instead of buying a single option?
It costs less than the single option and is less affected by time decay and falling volatility, but it caps how much you can gain.
Related terms
Educational content only, not financial advice.