Debit Spread

Bull call spread (bullish debit spread): Buy a lower-strike call and sell a higher-strike call, same expiration. You profit when the stock rises above the lower strike.

Example: NVDA at $120. Buy the $120 call for $6.00, sell the $125 call for $3.50. Net debit: $2.50 ($250 per contract). Max profit: $5 - $2.50 = $2.50 ($250) if NVDA is above $125 at expiration. Max loss: $2.50 ($250) if NVDA is below $120. Breakeven: $122.50 (lower strike + debit).

Bear put spread (bearish debit spread): Buy a higher-strike put and sell a lower-strike put, same expiration. You profit when the stock falls below the higher strike.

Example: TSLA at $180. Buy the $180 put for $8.00, sell the $170 put for $4.50. Net debit: $3.50 ($350 per contract). Max profit: $10 - $3.50 = $6.50 ($650) if TSLA is below $170 at expiration. Max loss: $3.50 ($350) if TSLA stays above $180. Breakeven: $176.50 (higher strike - debit).

Which to choose: Bull call spreads for bullish bets, bear put spreads for bearish bets. In both cases, the spread width (distance between strikes) determines the risk/reward ratio. Wider spreads have higher max profit but cost more.

Buying a naked call or put is simpler but more expensive and more exposed to theta decay and IV crush. Debit spreads address these issues:

Lower cost: The sold option offsets part of the purchased option's premium. A $6.00 call becomes a $2.50 spread after selling the further strike for $3.50. This reduces capital at risk by 58%.

Reduced IV crush impact: Both legs are affected by IV changes. In a spread, the short leg's IV loss partially offsets the long leg's IV loss. This makes debit spreads better for holding through events like earnings where IV crush is expected.

Less theta decay: The short leg's theta (which you collect as it decays) offsets some of the long leg's theta (which works against you). Net theta is lower for spreads than for naked options.

Capped profit: The trade-off for these benefits is a profit cap at the short strike. A naked call has unlimited profit potential; a call spread's max profit is the spread width minus the debit. You are trading unlimited upside for lower cost, less theta drag, and reduced IV risk.

When to use each: Buy naked options when you expect a large move and IV is low. Use debit spreads when you have a specific price target, when IV is elevated, or when you want to risk less capital per trade.

Profit target: Close at 50-75% of maximum profit. If your max profit is $2.50 and the spread is worth $1.75, close it. Waiting for the last 25-50% of profit requires the stock to be precisely above/below the short strike at expiration, which adds time risk for marginal gain.

Loss limit: Close at 50% of the debit paid. If you paid $2.50, close the position if it drops to $1.25. This prevents a total loss scenario and frees capital for other trades.

Time management: Debit spreads work best with 30-60 days to expiration. Below 14 DTE, gamma increases and the spread's value becomes very binary — either at max profit or near max loss. If the trade has not worked by 14 DTE, consider closing regardless.

Rolling: If the stock is moving in your direction but slowly, you can roll the spread to a later expiration — close the current spread and open a new one at the same strikes but further out. This gives the trade more time but costs additional debit.

Assignment risk: If the short leg goes deep ITM near expiration, it may be assigned early. This is manageable (exercise your long leg to offset) but can cause temporary margin requirements. Close the spread before expiration if both legs are ITM to avoid this.