Debit Spreads, Explained

What it is

You buy an option and sell a further out-of-the-money option of the same type and expiry. The one you sell offsets part of the cost of the one you buy, so you pay a net debit. That sold option also caps your profit — the trade-off for the lower cost.

Two flavours

• Bull call spread (bullish): buy a call, sell a higher-strike call.
• Bear put spread (bearish): buy a put, sell a lower-strike put.

The numbers (bull call example)

Stock at $50. You buy the $50 call and sell the $55 call for a net debit of $2.00 ($200). Strikes $5 apart.

• Max loss: the debit — $200, if the stock is below $50 at expiry.
• Max profit: width minus debit = ($5 − $2) × 100 = $300, reached at or above $55.
• Breakeven: $52 (long strike + debit).

Why use it instead of a single long option

• Cheaper than buying the call outright.
• Less time-decay drag — the short option decays in your favour, partly offsetting the decay on the long one.
• Less IV-sensitive — you're long and short volatility at the same time.

The cost: your upside is capped. You trade unlimited (but unlikely) upside for a cheaper, higher-probability, defined-risk trade.

When to use it

When you have a directional view to a target (you think it goes to about $55, not to the moon) and want defined risk for modest capital.

How TickerRisk helps

Check IV Rank and the calendar on each name — debit spreads are less volatility-sensitive than naked options, but you still want to know which catalysts sit inside your expiry.