Debit spreads tend to be more directional, whereas in credit spreads the investor collects money from it. You stand to profit when the stock price increases and it’s one of the four vertical spread options strategies. If you expect a small directional move that’s when you want to sell a credit spread. If you expect that the stock is going to make a big move and you have a directional view that is when you want to use a debit spread. Credit spreads will pay more money, have fewer risks, and high expected returns. Also, they have less directional risk as opposed to debit spreads. Which is better debit or credit spreads?Ĭredit spreads have a high probability of making money, compared to debit spreads. You can find options spread amongst complex trades. Options spreads are some of the most powerful tools available when trading options. On the other hand, if you expect a small directional move that’s when you want to sell a credit spread. If earnings are coming up and the stock is going to make a big move and you have a directional view, that is when you want to use a debit spread. Higher implied volatility conditions are better for selling credit spreads and lower implied volatility conditions are better for buying debit spreads. It means you pay for them and hope your directional pick is correct. – A debit spread is when you are moderately bullish of the market, and you expect a slight rise in the price of underlying in the near future. It is called a credit spread because the investor collects premium for it. In case of credit spreads, purchasing the lower strike put and selling the higher strike put results in a positive initial cash flow, or a credit. It’s called a debit spread because the investor must pay for it. – In case of debit spreads, a lower strike call is being purchased and a higher strike call is being sold, so the result is a negative cash flow, or a debit. It means you sell one option and buy another option at a further strike price in the same expiration cycle. Credit spreads involve purchasing of one option and simultaneous sale of another option in the same asset class but with different strike prices.

– If the strike price of the sold option is further from the market price than the strike price of the purchased option, then this is going to be a debit spread. Difference between Debit and Credit Spread Convention This is why it’s called a credit spread because you (the investor) collect money for it. The option you sell is more expensive than the option you buy which will lead to a net credit when entering the position. The strategy involves purchasing of one option and simultaneous sale of another option in the same asset class but with different strike prices.

Credit spreads have a high probability of making money, compared to debit spreads. Credit Spread is simple options strategy that is popular among income-driven traders, and you profit from stock price increases, decreases, or even if the stock price doesn’t move at all.

Debit credit spread