Credit spread vs debit spread: what is the difference?

One bullish view, both ways, in numbers

An example with round numbers. Bitcoin is at 80,000 and you expect it to hold or rise this week. All figures are for 10 lots, which is 0.01 BTC.

The debit version, a bull call spread: buy the 80,000 call for 1,300 and sell the 82,000 call for 600. You pay 700 per Bitcoin, 7 USDT. The most it can make is the 2,000 gap less the 700 paid: 13 USDT, if Bitcoin settles at or above 82,000. The breakeven is 80,700.

The credit version, a bull put spread: sell the 80,000 put for 1,250 and buy the 78,000 put for 550. You receive 700 per Bitcoin, 7 USDT, and keep all of it if Bitcoin settles at or above 80,000. The most it can lose is the 2,000 gap less the 700 received: 13 USDT. The breakeven is 79,300.

Now suppose Bitcoin goes nowhere and settles at 80,000. The debit spread loses its 7 USDT; the credit spread keeps its 7 USDT. That is the whole difference: one needs a move, the other needs the absence of one.

The four basic spreads

Two bullish, two bearish; one of each kind.

The lessons on the bull call spread and on hedging a sold option work two of these on real prices.

How traders choose between them

Three questions decide it.

• Do you expect a move, or only the absence of one? A move suits a debit spread; holding a level suits a credit spread.
• Is implied volatility high or low? High favours selling premium with credit spreads; low favours buying with debit spreads.
• Which profile do you prefer: losing small more often (debit), or winning small more often with a larger loss when wrong (credit)?

Two ways to be bullish on Bitcoin

A bull call spread buys a call and sells a higher one: you pay, and gain if Bitcoin rises. A bull put spread sells a put and buys a lower one: you are paid, and keep it if Bitcoin stays above the sold put. The card above prices both on real quotes.

Choosing between them

When implied volatility is high, options are expensive, which favours selling them: credit spreads. When it is low, buying is cheaper: debit spreads. Crypto IV often runs high, which tilts many traders toward credit spreads.

Common mistakes with spreads

Spreads cap the risk, not the errors.

• Calling a credit spread safe because it wins often. Its loss when wrong is larger than its gain when right.
• Making the spread so narrow that fees on four trades, two in and two out, take most of the profit.
• Closing one leg and leaving the other. A spread with its bought leg removed is a naked sold option.
• Expecting full profit early. A spread reaches its maximum value only near expiry, even when the price is already where you wanted it.