Credit or Debit? 2 Spread Strategies and When to Use Them

by Chris Pulver | Dec 2, 2024

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When it comes to options trading, two of the most effective tools in my playbook are credit and debit spreads. These strategies allow traders to generate income, manage risk and position for potential market moves — all while keeping risk defined.

Understanding when and how to use them is key to navigating today’s market environment.

The Case for Credit Spreads

Credit spreads are my go-to for trades that align with a backup plan.

Here’s how they work: You sell one option and buy another option further out of the money, creating a spread that generates credit up front. If the price stays within your target range, you keep the credit as profit.

The real advantage of credit spreads is flexibility. If the trade goes against you, the long leg of the spread can act as a hedge.

For example, if I sell a $100 put and buy a $99 put for $0.45 credit, and the stock drops to $85, I can cash in the long put. That profit offsets my assignment cost, giving me a lower break-even price on the shares.

This strategy works particularly well for stocks I’d like to own.

If the stock drops after say an earnings event, I can use the credit spread to hedge, reduce my cost basis, and establish an ownership position at a discount.

Just beware the potential for being assigned the shares.

Why Choose Debit Spreads?

Debit spreads, on the other hand, are a simpler option for traders who don’t want the complexity of assignment risk. In a debit spread, you buy one option and sell another closer to the money, limiting both your risk and your profit potential.

For example, if I buy a call and sell a higher strike call, my maximum profit occurs if the stock price exceeds the higher strike at expiration. This makes debit spreads an excellent choice for smaller accounts or traders who prefer a black-and-white outcome.

Debit spreads perform best when the underlying moves quickly in the desired direction, as time decay impacts both legs.

There’s no need to worry about taking ownership of shares — the trade either hits your target or it doesn’t.

When to Use Each Strategy

The choice between credit and debit spreads often comes down to your risk tolerance and trading goals:

Use credit spreads if you’re comfortable with potential assignment and have a backup plan to own the stock or repair the trade.
Use debit spreads if you want a straightforward, risk-defined trade with no assignment concerns.

Personally, I lean heavily on credit spreads because they offer more flexibility — but I also know when to scale back. For instance, in volatile periods or when I’m less certain about a stock’s direction, debit spreads provide a cleaner, lower-stress alternative.

At the end of the day, the key is understanding how each tool fits into your broader trading plan. Whether you’re targeting income or hedging against risk, credit and debit spreads are powerful strategies that can help you navigate the market with confidence.

I’ll see you in the markets.

Chris Pulver
Chris Pulver Trading

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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.

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