Debit Spreads | Notion

What is a Debit Spread?

A debit spread is an options strategy where you buy and sell options simultaneously with the same expiration date but at different strike prices. This strategy creates a "net debit," meaning you pay to enter the trade. The goal of a debit spread is to lower your upfront cost compared to buying a single option while limiting both your potential profit and loss.

Think of it like buying a discounted movie ticket because you agree to sell your seat if someone offers more money for it later. You still get to see the movie, but your earnings (or savings) are capped.

How Debit Spreads Work

Call Debit Spread (Bullish)

When to Use: You think a stock’s price will go up.
How It Works:
1. Buy a call option with a lower strike price.
2. Sell a call option with a higher strike price.

<aside> 🤔 Example:

Imagine Stock ABC is trading at $85, and you expect it to rise to $90 in the next few weeks.

Buy a $85 call for $1.50 (costs $150 since 1 contract = 100 shares).
Sell a $90 call for $0.50 (earn $50).
Your net debit (cost) = $1.00 or $100 ($150 - $50).

Max Profit:

If ABC is above $90 at expiration, you earn the difference between the strikes ($90 - $85 = $5.00) minus the premium paid ($1.00). Your max profit = $4.00 or $400.

Max Loss:

If ABC stays below $85, you lose the $100 premium paid.

</aside>

Put Debit Spread (Bearish)

When to Use: You think a stock’s price will go down.
How It Works:
1. Buy a put option with a higher strike price.
2. Sell a put option with a lower strike price.

<aside> 🤔 Example:

ABC is trading at $90, and you expect it to drop to $82 soon.

Buy a $90 put for $2.50 (costs $250).
Sell a $85 put for $1.00 (earn $100).
Your net debit = $1.50 or $150 ($250 - $100).