Debit and Credit Spreads are two common trading strategies involving simultaneous buying and selling options contracts. Both methods may overlap in many functionalities as well as some district differences. The significant difference between Debit Spread and Credit Spread is their structure and resulting payoff profile. Debit Spread is a strategy that can be defined as an investor buying an option with a premium and selling a chance with a lower premium.
Credit Spread is a strategy in which an investor sells an option with a higher compensation and buys a chance with a lower premium. Moreover, both systems have the same expiration date and underlying asset. Let us discuss the main differences between Debit Spread and Credit Spread.
What is Credit Spread?
Credit Spread is a famous strategy in which an investor sells a product with a higher premium and purchases a lower one. Both tips have some expiration date and underlying assets. The market outlook for Credit Spread is neutral and mildly bullish. Moreover, the maximum profit is limited to the net Credit received. At the same time, the maximum loss is limited to the difference between strike prices plus net Credit accepted.
Furthermore, it is used for hedging and income generation. Bull put SSpread, and bear call spread is good examples of Credit Spread. Credit Spread is used when an investor expects the underlying asset’s price to remain stable or move slightly in one direction.
What is Debit Spread?
Debit Spread is a strategy that involves buying an option with a higher premium and selling a chance with a lower premium on the same underlying asset and expiration date. The no cost of the option purchased is higher than the premium received for the option sold, resulting in a net debit to the investor’s accounts. It is used when an investor expects a magnificent move in the underlying asset’s price, either bearish or bullish. Moreover, the maximum profit is the strike prices of two options minus the net credit debit paid. Furthermore, the maximum loss is limited to the net debit paid.
Critical differences between Debit Spread and Credit Spread
- The market outlook for Debit Spread is bearish or bullish, while the market of Credit Spread is neutral or mildly bullish.
- Net investment of Debit Spread is Net Debit while Net investment of Credit Spread is no Credit.
- Debit Spread is used for speculation and directional bets, while Credit Spread is used for Hedging and income generation.
- Bull call spread and bear put SSpread are good examples of Debit Spread, whereas the model of Credit Spread is a bull put SSpread and bear call SSpread.
- Debit Spread has a strike price for the long option plus the net DDebit paid, while Credit Spread has the strike price of the short option plus the net Credit received.
|Criteria||Debit Spread||Credit Spread|
|Market outlook||Bearish or bullish||Neutral or mildly bearish|
|Net investment||Net DDebit||Net Credit|
|Option position||A long higher premium option, short lower premium option||A fast, higher premium option, a long lower premium option|
|Used for||Speculation, directional bets||Hedging, income generation|
It is concluded that Credit and Debit spreads are pretty different. They serve different roles in the money market and show deviation in their working schemes.