Debit vs Credit Spreads
Two options, same type, same expiration, different strikes — pay for the pair and you have a debit spread, get paid for it and you have a credit spread, and that one difference flips almost everything about how the trade behaves.
A vertical spread is the most common two-leg structure in options: you buy one option and sell another of the same type (both calls or both puts) and the same expiration, at different strike prices. The word “vertical” refers to the strikes stacking on an option chain. Both flavors are defined risk — the long leg caps the loss, so the worst case is known before you enter. What separates them is whether money flows into your account or out of it when you open the trade.
Debit spread: you pay to put it on
In a debit spread you buy the nearer, more expensive option and sell the farther, cheaper one. Because the option you buy costs more than the one you sell, you pay a net amount — the debit. It is a directional bet: you need the stock to move your way to profit.
A bull call spread is the standard example. Buy a lower-strike call, sell a higher-strike call, same expiration. It profits if the stock rises. The maximum profit is the width between the strikes minus the debit paid. The maximum loss is the debit. The breakeven is the long strike plus the debit. Time decay works against this position, because you own more option value than you sold and that value erodes as expiration nears.
Credit spread: you get paid to put it on
In a credit spread you sell the nearer, more expensive option and buy the farther, cheaper one as protection. You collect more than you pay, so you receive a net credit. It profits from the underlying staying away from your short strike and from time decay working in your favor.
A bull put spread — also called a put credit spread — is the standard example. Sell a higher-strike put, buy a lower-strike put, same expiration. It profits if the stock stays up. The maximum profit is the credit collected. The maximum loss is the width between the strikes minus the credit. The breakeven is the short strike minus the credit. Time decay works for this position, because you sold more option value than you bought.
| Feature | Debit spread | Credit spread |
|---|---|---|
| Cash at entry | You pay a net debit | You collect a net credit |
| Direction it favors | Stock moves your way | Stock stays away from short strike |
| Time decay | Against you | For you |
| Maximum profit | Width minus debit | The credit collected |
| Maximum loss | The debit paid | Width minus credit |
| Typical use | A directional move within a set time | Staying still or drifting the right way, with decay helping |
Worked example: a 5-point put credit spread
A stock trades at 100 dollars. You build a put credit spread: sell the 95 put and buy the 90 put, same expiration. The strikes are 5 points apart — a 5-point-wide spread. You collect a net credit of 1.50, or 150 dollars (one contract is 100 shares).
- Maximum profit is the credit: 150 dollars. You keep the full credit if the stock closes at or above 95 at expiration and both puts expire worthless.
- Maximum loss is the width minus the credit: 5.00 minus 1.50 equals 3.50, or 350 dollars. This is the most you can lose even if the stock falls far below 90.
- Breakeven is the short strike minus the credit: 95 minus 1.50 equals 93.50. Above that level at expiration the position is profitable; below it, the loss grows until it hits the 350 dollar cap at 90.
Notice the asymmetry that defines credit spreads: you risk 350 dollars to make 150 dollars. The trade can win more often than it loses while still requiring care, because a single maximum loss erases more than two maximum wins.
The long leg that caps your loss also caps your gain. A spread trades away the home run for a known worst case. There is no scenario in the example above where you make more than 150 dollars, no matter how far the stock climbs — the higher strike sells away that upside. Defining the worst day and capping the best day are the same decision, made at the same moment.
Both spreads here are defined risk by construction. To see how that compares with positions whose loss is open-ended, read Defined vs Undefined Risk, and for the role margin plays when there is no long leg, see Naked vs Covered Options.
Educational only — not investment advice. Options involve a substantial risk of loss and are not suitable for every investor.