Debit Spread

A debit spread is an options trade made up of two options — usually the same type (both calls or both puts), same expiration, but different strike prices — where you pay money out of your account to open the position. That upfront payment is called the "debit," and it represents the maximum amount you can lose on the trade, since you own the more expensive option and sold a cheaper one against it.

Here's how it works: you buy one option and simultaneously sell another. If the option you buy costs more than the option you sell, the net effect is money leaving your account, hence "debit." The option you bought gives you the main directional exposure, while the option you sold reduces your cost and caps your potential profit at the same time. This trade-off — lower cost and lower risk, but also a lower ceiling on gains — is the defining feature of a debit spread.

The nuance that trips people up is confusing which leg is "long" and which is "short," and forgetting that the debit paid is your entire risk on the trade — nothing more. For example, in a call debit spread, you buy a call at a lower strike price and sell a call at a higher strike price. Because lower-strike calls are always worth more than higher-strike calls with the same expiration, this combination always costs money, hence "debit." The opposite structure, where you collect money instead of paying it, is called a credit spread.

People sometimes assume a debit spread is inherently "safer" than buying a single option outright because it costs less. That's true in dollar terms, but the sold option also caps how much you can make, so it's a trade-off, not a free upgrade.