What is a Debit Spread? (Discounted Directional Bets)
A debit spread reduces the cost of directional trades by selling an option to fund part of your purchase.
Quick Summary
A Debit Spread is when you buy one option and sell another of the same type at a different strike. You pay a net debit (cost) upfront, but it's less than buying the option alone. Your profit is capped at the spread width minus your cost.
In our Credit Spread post, we discussed selling options to collect income with defined risk.
But sometimes, you don't want to play defense. Sometimes, you're convinced a stock is going to move strongly in one direction, and you want to play offense.
Normally, you would just buy a Call or a Put. But as we've learned, buying options outright is expensive and suffers from Time Decay (Theta).
The Naked Option Problem
Buying options outright has two major costs
High Upfront Cost
ATM options are expensive, requiring large capital
Time Decay
Every day the stock doesn't move, your option loses value
How do you lower the cost and reduce time decay damage? The answer is the Debit Spread—a discounted directional bet.
The Definition: What is a Debit Spread?
THE STRATEGY
Buy an Option + Sell a Cheaper Option = Lower Net Cost (Debit)
A Debit Spread (also called a Vertical Debit Spread) involves two simultaneous trades:
- Buy an option (usually ATM or ITM)
- Sell a cheaper option (further OTM) of the same type and expiration
Because the option you buy costs more than the option you sell, money leaves your account to open the trade. This net cost is called a Debit.
Bull Call Spread
Bullish bias—profit if stock rises to your target
Bear Put Spread
Bearish bias—profit if stock falls to your target
The "Coupon Code" Concept
The option you sell acts as a "coupon" that reduces the price of the option you buy. You're funding part of your trade by giving up potential profits beyond a certain level.
Example: The Bull Call Spread
Current Stock Price
$200
Your target: Stock will reach $220
The spread costs 40% less and has a lower break-even point!
The Trade-Off: Capped Upside
There's no free lunch. By selling the $220 Call to fund your trade, you've given away any profit above $220.
Debit Spread Payout Diagram
Profit is capped at the short strike
BELOW $200
Max Loss
$206 - $220
Profit Zone
ABOVE $220
Capped
Even if NVDA rockets to $300, you only profit up to $220
Calculating Max Profit and Max Loss
The Debit Spread Math
MAXIMUM PROFIT
= Spread Width − Net Debit
($220 − $200) − $6 = $14
$1,400
MAXIMUM LOSS
= Net Debit Paid
$6.00 × 100 shares
$600
The risk/reward ratio is favorable: risk $600 to potentially make $1,400. But remember—you need the stock to actually reach your target for maximum profit.
Why Use a Debit Spread?
Three Key Advantages
The option you sold gains value from time decay, partially offsetting the decay on your long option. It "stops the bleeding."
If IV crashes, the short option helps cushion the blow since you benefit from volatility dropping on that leg.
Easier to hold a trade when you have $600 at risk rather than $1,000. Lower entry price = calmer decision making.
Debit Spread vs. Credit Spread
Two Sides of the Same Coin
- Receive money upfront
- Profit if stock stays AWAY from target
- Time decay works FOR you
- Defensive / income strategy
- Pay money upfront
- Profit if stock moves TO your target
- Time decay works against you (but reduced)
- Offensive / directional strategy
Frequently Asked Questions
Summary
A Debit Spread is a discounted directional bet.
You're saying: "I think the stock is going to reach this specific target, but I'm willing to cap my profits there in exchange for a lower entry cost."
If you're right, you can make a strong return on investment. If you're wrong, you lose less money than if you had simply bought the option outright. It's a strategy of precision over pure speculation.
The Debit Spread Trade-Off: Pay less upfront, accept a capped profit. You get a lower break-even, reduced time decay, and defined risk—in exchange for giving up unlimited upside potential.
Important: Debit spreads require the stock to move in your direction to profit. Unlike credit spreads, you can lose your entire investment if the stock doesn't move or moves against you. Always have a clear price target and time horizon before entering.
