13/12/2019 Credit Spread vs. Debit Spread: What's the Difference?

PART OF
Options Trading Guide

OPTIONS & DERIVATIVES TRADING OPTIONS TRADING STRATEGY & EDUCATION

Credit Spread vs. Debit Spread: What's the

Difference?

BY STEVEN NICKOLAS | Updated Sep 10, 2019

TABLE OF CONTENTS
Overview
Credit Spreads
Debit Spreads
EXPAND +

Credit Spread vs. Debit Spread: An Overview

When trading or investing in options, there are several option spread strategies that one
could employ—a spread being the purchase and sale of different options on the same
underlying as a package.

https://www.investopedia.com/ask/answers/042215/whats-difference-between-credit-spread-and-debt-spread.asp 1/6
13/12/2019 Credit Spread vs. Debit Spread: What's the Difference?

PART OF
Options Trading Guide

While we can classify spreads in various ways, one common dimension is to ask whether or
not the strategy is a credit spread or a debit spread. Credit spreads, or net credit spreads, are
spread strategies that involve net receipts of premiums, whereas debit spreads involve net
payments of premiums.

https://www.investopedia.com/ask/answers/042215/whats-difference-between-credit-spread-and-debt-spread.asp 2/6
13/12/2019 Credit Spread vs. Debit Spread: What's the Difference?

PART OF
Options Trading Guide
KEY TAKEAWAYS
An options spread is a strategy that involves the simultaneous buying and selling of
options on the same underlying asset.
A credit spread involves selling a high-premium option while purchasing a low-
premium option in the same class or of the same security, resulting in a credit to the
trader's account.
A debit spread involves purchasing a high-premium option while selling a low-
premium option in the same class or of the same security, resulting in a debit from
the trader's account.

Credit Spreads
A credit spread involves selling, or writing, a high-premium option and simultaneously
buying a lower premium option. The premium received from the written option is greater
than the premium paid for the long option, resulting in a premium credited into the trader or
investor's account when the position is opened. When traders or investors use a credit
spread strategy, the maximum profit they receive is the net premium. The credit spread
results in a profit when the options' spreads narrow.

For example, a trader implements a credit spread strategy by writing one March call option
with a strike price of $30 for $3 and simultaneously buying one March call option at $40 for
$1. Since the usual multiplier on an equity option is 100, the net premium received is $200
for the trade. Furthermore, the trader will profit if the spread strategy narrows.

A bearish trader expects stock prices to decrease, and, therefore, buys call options (long call)
at a certain strike price and sells (short call) the same number of call options within the same
class and with the same expiration at a lower strike price. In contrast, bullish traders expect
stock prices to rise, and therefore, buy call options at a certain strike price and sell the same
number of call options within the same class and with the same expiration at a higher strike
price.

Debit Spreads
Conversely, a debit spread—most often used by beginners to options strategies—involves
buying an option with a higher premium and simultaneously selling an option with a lower

https://www.investopedia.com/ask/answers/042215/whats-difference-between-credit-spread-and-debt-spread.asp 3/6
13/12/2019 Credit Spread vs. Debit Spread: What's the Difference?

premium, where the premium paid for the long option of the spread is more than the
premium received from the written option.
PART OF
UnlikeOptions Trading
a credit spread, Guidespread results in a premium debited, or paid, from the trader's
a debit
or investor's account when the position is opened. Debit spreads are primarily used to offset
the costs associated with owning long options positions.

For example, a trader buys one May put option with a strike price of $20 for $5 and
simultaneously sells one May put option with a strike price of $10 for $1. Therefore, he paid
$4, or $400 for the trade. If the trade is out of the money, his max loss is reduced to $400, as
opposed to $500 if he only bought the put option.

Related Articles
OPTIONS TRADING STRATEGY & EDUCATION
Which Vertical Option Spread Should You Use?

OPTIONS TRADING STRATEGY & EDUCATION

10 Options Strategies To Know

OPTIONS TRADING STRATEGY & EDUCATION

Vertical Bull and Bear Credit Spreads

OPTIONS TRADING STRATEGY & EDUCATION

What Is A Bull Put Spread?

OPTIONS TRADING STRATEGY & EDUCATION

What is a Bull Call Spread?

https://www.investopedia.com/ask/answers/042215/whats-difference-between-credit-spread-and-debt-spread.asp 4/6
13/12/2019 Credit Spread vs. Debit Spread: What's the Difference?

PART OF
FINRA EXAMS
Options Trading Guide
Tips for Answering Series 7 Options Questions

Partner Links

Related Terms
Debit Spread Definition
A debit spread is a strategy of simultaneously buying and selling options of the same class, different
prices, and resulting in a net outflow of cash. more

Credit Spread Definition

A credit spread reflects the difference in yield between a treasury and corporate bond of the same
maturity. It also refers to an options strategy. more

Vertical Spread Definition

A vertical spread involves the simultaneous buying and selling of options of the same type (puts or
calls) and expiry, but at different strike prices. more

Bull Spread

https://www.investopedia.com/ask/answers/042215/whats-difference-between-credit-spread-and-debt-spread.asp 5/6
13/12/2019 Credit Spread vs. Debit Spread: What's the Difference?

A bull spread is a bullish options strategy using either two puts or two calls with the same underlying
asset and expiration. more

Buy A Spread Definition

PART OF
Options Trading Guide
Buying a spread is an options strategy involving buying and selling options on the same underlying
and expiration but different strikes for a net debit. more

Understanding the Bull Vertical Spread

A bull vertical spread is used by investors who feel that the market price of a commodity will
appreciate but wish to limit the downside potential associated with an incorrect prediction. A bull
vertical spread requires the simultaneous purchase and sale of options with different strike prices.
more

TRUSTe

Terms of Use Contact Us News

Advertise Dictionary Careers

Investopedia is part of the Dotdash publishing family.

The Balance | Lifewire | TripSavvy | The Spruce and more

https://www.investopedia.com/ask/answers/042215/whats-difference-between-credit-spread-and-debt-spread.asp 6/6