The Difference between Debit Spreads and Credit Spreads

With a lot of traders focusing on credit spreads, some who do not would wonder what do credit spreads have that debit spreads do not and what makes them better. This baffles them especially when debit and credit spreads can be formed using puts.

According to TradingMarkets.com , there is not much difference between the two especially when it comes to performance. They both have lower and upper boundaries to their potential values and these values can go to a minimum of zero to a maximum of the difference in strike prices.

There is a distinction between the two though and this depends on the strikes that are being chosen. Traders are more apt to choose credit spreads when they have confidence in what the stock price will not do while traders choose debit spreads when they are sure of what the stock price will do.

Sometimes traders are more motivated to use credit spreads due to the fact that they want to sell options and wanting to avoid naked writing at the same time.  When a trader wants to sell out of the money options in order to have time premium, the trader would often buy farther out of the money options at the same time so that the short options would be covered and that he can avoid naked writing.