Debit Spreads: Directional Options Trading

What Are Debit Spreads?

Debit spreads are directional strategies where you buy an option and sell a further OTM option to reduce cost. You pay a net debit upfront and profit from directional moves within defined risk.

Types of Debit Spreads:

1. Bull Call Spread (Bullish)

• Buy lower strike Call
• Sell higher strike Call
• Reduced cost vs naked call
• Max Profit: Spread width - Debit paid

2. Bear Put Spread (Bearish)

• Buy higher strike Put
• Sell lower strike Put
• Reduced cost vs naked put
• Profits from downward moves

Advantages of Debit Spreads

• Lower Cost: Cheaper than buying calls/puts outright
• Defined Risk: Max loss = debit paid
• Reduced Theta: Short option offsets time decay
• Better Risk/Reward: Smaller moves needed for profit

When to Use Debit Spreads:

• Moderately bullish/bearish outlook
• Want to reduce cost of directional trade
• Target price within spread range
• Low IV environment (cheaper entries)

Strike Selection:

• Buy ATM or slightly ITM
• Sell 1-2 strikes OTM
• Target 30-50% return on risk
• 60-90 DTE for wider breakeven

Exit Strategy:

• Take profit at 50-75% of max gain
• Cut losses at 50% of debit paid
• Roll if still bullish/bearish
• Close 2-3 weeks before expiration