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.
  • Get smarter and more educated about the nuances and risk of trading from others like you.
  • Helps professional traders see their blind spots.
  • Have access to resources and be a resource to other traders.
  • Get quick responses from the SteadyOptions team.

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 market neutral strategies for active traders

10-15 trade ideas per month

Targets 5-7% monthly net return

Visit our Education Center

Recent Articles

Articles

  • Should You Aim for 100% Gains?

    Options can be risky, even very risky, but they don't have to be. There are a lot of myths and misconceptions about options trading. Here is one of them: you should aim for at least 100% gain in each option trade, otherwise it is not worth the risk. Is it true?

     

    By SteadyOptions,

    • 0 comments
    • 185 views
  • What Is True Diversification?

    On CNBC's Mad Money, Jim Cramer has a segment called "Am I Diversified?". A caller tells Jim about five stocks in his or her portfolio and Jim has to decide if the caller's portfolio is "diversified." So for the retail investors out there, Cramer is sharing his top tips on how to manage your own portfolio.

    By SteadyOptions,

    • 0 comments
    • 168 views
  • Exiting An Iron Condor Trade

    One of the more difficult aspects of options trading is knowing when to take a profit. No one likes to ‘leave money on the table.’ However, I also hope that no one likes to lose thousand of dollars trying to earn another $50 to $100. There is a compromise somewhere.

    By MarkWolfinger,

    • 0 comments
    • 181 views
  • How To Protect NFLX Shares Before Earnings

    NFLX is scheduled to report earnings on Monday July 19, 2016. I was asked the following question on one of the online forums: "What option to trade to protect NFLX shares being held thru earnings on Monday"? My answer was: "That depends what level of protection you want".

    By SteadyOptions,

    • 0 comments
    • 281 views
  • Climbing the Wall of Worry

    Our LC Momentum model holds stocks as its core position. Long term empirical evidence across global equity markets shows equities significantly outperform all other major asset classes since 1900[1]. Morgan Housel recently published an article about the last seventy years of US stock market returns, and how they have to regularly climb the wall of worry.

    By Jesse,

    • 0 comments
    • 186 views
  • How To Benefit From Italian Crisis

    In case you do not follow world economic events, you might want to be aware of the fact that Italy’s banking sector is teetering on the edge of collapse.  Bad debts held by Italian banks make up seventeen percent (17%) of all outstanding loans in the country.  This equates to about 360 billion euros or 20% of the entire GDP of Italy.

    By cwelsh,

    • 0 comments
    • 224 views
  • Should You Leg Into Iron Condor?

    The wings of an iron condor options trading strategy consist of two vertical credit spreads; i.e., a bull put spread and a bear call spread. The process of "Legging In" offers the promise of higher yields and enhanced probabilities of options trade success, but the question is whether it is worth the risk.

    By SteadyOptions,

    • 0 comments
    • 428 views
  • Why Simple Isn’t Easy

    Living through a track record is very different than viewing it on paper. Even the most efficient track records in history have periods where they would have been very uncomfortable to stick with. Warren Buffett has had multiple 30-50% drawdowns in his career. In the world of indexing, there is nothing magical about the S&P 500.

    By Jesse,

    • 2 comments
    • 282 views
  • Thinking in terms of decades

    Peak to valley, from June 1998 – March 2000 Warren Buffett’s Berkshire Hathaway lost over 50%. In the same period, the S&P 500 returned over 45% and the Nasdaq 100 returned over 315%. A new client said to me the other day “I’m in this for the long term, but if after a couple years I don’t see any gains then I’m going to tell you this isn’t working.”

    By Jesse,

    • 0 comments
    • 238 views
  • The Risks of Weekly Credit Spreads

    Internet is full of hype. There are hundreds of options trading "gurus" and options newsletters promising you all kinds of ridiculous returns like "5% per week". What most traders don't realize are the risks that come with those returns. I would like to share with you an email I got from one of those options "gurus".

    By SteadyOptions,

    • 0 comments
    • 348 views



User Feedback


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

Loading...