A debit spread buys an option and sells a further out-of-the-money one at the same expiration, paying a net debit. Max loss is the debit paid; max profit is the width minus the debit, reached when the stock moves through the short strike.
A debit spread is a vertical spread opened for a net cost. One option is bought and a cheaper one further out of the money is sold, same underlying and expiration. The sold option lowers the price and the breakeven of the bought one, and in exchange caps how much the trade can make.
| Bull call spread | Bear put spread | |
|---|---|---|
| Legs | Long call, short call at a higher strike | Long put, short put at a lower strike |
| Outlook it is built for | Stock rises | Stock falls |
| Full profit if | Stock is above the short call at expiration | Stock is below the short put at expiration |
| Breakeven | Long strike plus debit | Long strike minus debit |
| Delta | Positive | Negative |
A $100 stock with 30 days to expiration and a flat 30% implied volatility (model prices). A bull call spread buys the 100 call for $3.59 and sells the 105 call for $1.66.
| Stock at expiration | What happens | Profit or loss per contract |
|---|---|---|
| $98 | Both calls expire worthless | -$193 |
| $100 | Both calls expire worthless | -$193 |
| $101.93 | 100 call worth $1.93 | $0 |
| $103 | 100 call worth $3.00 | +$107 |
| $105 or higher | Short 105 call offsets every dollar above 105 | +$307 |
Under the same model, the stock finishes above the $101.93 breakeven about 41 percent of the time. A debit spread trades a lower chance of profit for a payout larger than its risk, the reverse of a credit spread.
A bull put spread on the same 100 and 105 strikes, selling the 105 put and buying the 100 put, collects about $3.06, almost exactly the debit spread's $3.07 maximum profit. Both have nearly the same payoff at expiration; the difference is cash flow and which legs are in the money. That is why the real choice between them is about conditions, covered in credit spreads vs debit spreads: debit structures fit when options are cheap relative to realized movement (a negative NVRP) and a directional view exists.
Width is commonly set from the expected move, placing the short strike near the forecast rather than beyond it, so the spread reaches full value if the stock moves as much as the chain implies. The debit spread calculator shows max loss, max profit and breakeven for any strikes.
Max profit is the width between the strikes minus the debit, times 100 per contract; max loss is the debit. A $5 wide bull call spread bought for $1.93 can make $307 and lose $193, with a breakeven at the long strike plus $1.93.
A debit spread pays premium and needs the stock to move toward the short strike; a credit spread collects premium and profits if the stock stays away from it. On the same strikes, the two have nearly the same payoff at expiration and differ in cash flow and which legs are in the money.
Commonly when there is a directional view and options are cheap relative to how much the stock has actually been moving. The sold leg lowers the cost and breakeven of the bought leg in exchange for capping the profit.