A debit spread is an options trading strategy that involves simultaneously buying and selling options of the same type on the same underlying asset, where the purchased option costs more than the sold option, resulting in a net debit to the account. The maximum profit is limited to the difference between the strike prices minus the net premium paid, while the maximum loss is limited to the premium paid. Debit spreads are used when a trader has a directional bias but wants to reduce the cost of buying options outright.
Example
“The trader opened a bull call debit spread by buying the $50 call for $3.00 and selling the $55 call for $1.00, paying a net debit of $2.00 per share.”