SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Debit Spreads Vs. Credit Spreads


 

There is a lot of confusion and misconception about debit and credit spreads. One of the most common misconceptions:

"One of the many drawbacks of a credit spread is that it will tie up so much capital."

Another misconseption:

“Selling credit spreads is like picking up pennies in front of a steam roller.”

 

Lets address those misconceptions.

 

The simple truth is that credit and debit spreads require exactly the same capital. You just have to compare apples to apples. Lets look at July AAPL options as an example.

Trade #1:

  • Buy AAPL July 2012 600 call
  • Sell AAPL July 2012 590 call

 

Trade #2:

  • Buy AAPL July 2012 600 put
  • Sell AAPL July 2012 590 put

 

Both trades are bearish - the maximum gain is realized if the stock is below $590 by July expiration. If the stock stays above $600, both trades will experience the maximum loss.

 

In the first trade, you get a $788 credit. The margin requirement is $212 which is the difference between the strikes less the credit received. If the stock is below $590, both options will be worthless and you keep the whole credit. The maximum gain is 271% (788/212).

 

In the second trade, you pay a $214 debit. The maximum gain is realized when the stock is below $590, in which case the spread will be worth $1,000. The maximum gain is 267% (786/214).

 

The maximum gain of the first trade is slightly higher than the first trade, but the difference is very small. The capital requirements and P/L profiles of both trades are very similar, almost identical.

 

The bottom line: what determines the P/L graph of the spread is not the credit or debit, it’s the strikes you are using. The same trade can be done for credit or debit, using calls or put. As long as the same strikes are used for both trades, the results will be very similar, almost identical.

 

Want to learn more about options?

 

Start Your Free Trial

Edited by SteadyOptions

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Profit With Non-Directional Trading

    Directional and non-directional are two variations of trading strategy. Directional trading strategy is simpler, but many traders are successfully using non-directional trading strategy. Non-directional trading strategy is the best option for traders who do not want to bet on the direction of the markets or individual stocks.

    By Kim,

    • 9 comments
    • 361 views
  • SPX Calendar Spreads: Historical P&L Levels

    We decided to investigate SPX calendar spreads from 2007 to present. More specifically, we wanted to know how frequently unmanaged SPX calendar spreads reached specific profit and loss levels relative to the initial debit paid. The results can be used for practical use of the calendar spread strategy.

    By Kim,

    • 3 comments
    • 563 views
  • Expiration Surprises to Avoid

    Unless buying or selling options with a distant expiration date (LEAPS), each trader understands that the value of an option portfolio becomes increasingly volatile as the time to expiration decreases. It is important to be aware of specific situations that may crush (or expand) the value of your positions. 

    By MarkWolfinger,

    • 0 comments
    • 263 views
  • Betting on AAPL Earnings?

    Apple is a company that tends to surprise Wall Street every time it reports its quarterly earnings, usually on the upside, occasionally on the down. As a result, the stock often makes big moves the next day - sometimes as much as 7-8%. How can you leverage those moves?

    By Kim,

    • 0 comments
    • 1,285 views
  • Options: The Zero Sum Game Myth

    Zero-sum is a situation in game theory in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero. A zero-sum game may have as few as two players, or millions of participants. Options trading is considered by many a zero sum game. But is it really a zero sum game?

    By Kim,

    • 3 comments
    • 1,058 views
  • SteadyOptions 2016 - Year In Review

    2016 marks our firth year as a public service. We had a good year overall. We closed 127 trades in 2016. The model portfolio produced 40.1% compounded gain on the whole account based on 10% allocation. The winning ratio was pretty consistent around 66%. We had three losing months in 2016.

    By Kim,

    • 0 comments
    • 947 views
  • Brexit Still Affects The Stock Market

    The end of 2016 may well have seen high consumer spending and a low unemployment rate, but there are concerns for 2017.The people of the UK voted for their nation to exit the European Union - a move known as Brexit, and the world awaits with different views to see the impact.

    By Kim,

    • 0 comments
    • 1,048 views
  • Few Facts About Implied Volatility

    The following infographic describes the facts about implied volatility, where does it come from and how to calculate implied volatility. Implied volatility is an estimated volatility of a security’s price. It is very helpful in calculating the probability and is used to adjust the risk control and trigger trades.

    By Kim,

    • 5 comments
    • 1,007 views
  • Early Exercise: Call Options

    How would a trader like you decide to do early exercise? Say you bought calls when they were trading in the 1.0 -> 2.5 range, now underlying has risen so that calls trade bid-ask at 4.0 / 4.8 and there is strong possibility of it going higher. Also assume in another case that they trade in the 6.0 to 7.0 range.

    By MarkWolfinger,

    • 0 comments
    • 745 views
  • How To Trade Risk Reversals

    A risk reversal is a strategy that involves selling a put and buying a call with the same expiry month. This is also known as a bullish risk reversal. A bearish risk reversal would involve selling a call and buying a put. Today we’re going to examine the bullish risk reversal.

    By Kim,

    • 0 comments
    • 1,718 views



We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   You have pasted content with formatting.   Remove formatting

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

Loading...