Debit spread

A debit spread is an options strategy involving two options at different strikes where you pay a net premium upfront. You buy one option and sell another at a worse strike to reduce your cost, capping both your maximum profit and your maximum loss.

Two main types:

• Bull call spread: Buy a lower-strike call, sell a higher-strike call , profit if stock rises
• Bear put spread: Buy a higher-strike put, sell a lower-strike put , profit if stock falls

Why debit spreads are used: They provide directional exposure at a lower cost than buying a single option outright. The short option reduces your premium paid but caps your upside at the spread width.

Ideal conditions: Low IV rank , options are cheaper, making it more cost-effective to buy premium. In high-IV environments, the long option is expensive and the short option may not fully offset the elevated cost.

Maximum profit and loss:

• Max profit = Spread width − debit paid
• Max loss = Debit paid
• Both are known before you enter the trade

Example: Buy the $190 call / sell the $200 call on AAPL (at $185) for a $3.50 debit. Max profit = $6.50 per share ($650). Max loss = $3.50 per share ($350). Breakeven = $193.50.

Related terms: Credit spread, bull call spread, bear put spread, defined risk, premium, IV rank

Try it on Stryke: Screen for low IV rank directional setups in the Options Screener.

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