Comments on: Credit vs Debit Spread—Which is Better?

By: Keith Harrison

Keith Harrison — Fri, 06 Apr 2012 23:41:26 +0000

This is all a bit difficult to take in, folks. A couple of examples of various kind of spreads, their percentage of risk, the amount of margin needed and the possibilities for profit and loss would be VERY useful, as it all seems a bit abstract, especially for those, like me, who are relatively new to these complexities. Could anyone give some recent examples of successful trades on credit or debit spreads and the risks they took. That would help a lot.
Thanks.

By: kamlesh

kamlesh — Mon, 06 Feb 2012 05:01:52 +0000

i think if u r technically sound dhen, better to do debit spread with the trend and do credit spread on the opposite side of the trend.if u go wrong in judging the trend do adjustment in credit spread in double quantity.

By: Jeff

Jeff — Sun, 29 May 2011 21:20:41 +0000

I agree, in part. If one “knew” how high a stock would move, then the natural play would be sell naked. But, since nobody does know, the obvious smart strategy is Credit spreads, with potential for morphing into Iron Condors for additional profit.

By: Steve Johnson

Steve Johnson — Mon, 18 Apr 2011 14:57:54 +0000

The better of the two would be a credit spread for me -
the percentage is on your side – can profit in a sideways makt. as well. If one knows how high a stock might move, then a debit spread could be the choice. However, either one is a gamble. It seems knowing the volatility on either position in advance is necessary before choosing to invest.

By: Tom Nunamaker

Tom Nunamaker — Sat, 09 Apr 2011 06:58:30 +0000

Any vertical spread with a short option ITM is at risk of assignment. It doesn’t matter if it’s a debit or credit. If you have a vertical spread in this situation, keep an eye on the time premium. If it gets under $0.10 or $0.15, I’d either close the position, roll the short option or box the position off to a riskless position… unless you want to be assigned.

ITM options are more expensive and have bigger bid/ask spreads and are often not as liquid as ATM options. You can get burned trying to get out of an ITM option with slippage.

To avoid the exercise and expensive ITM options, most people trade OTM credit spreads.

By: MIKE LOOS

MIKE LOOS — Tue, 29 Jun 2010 13:39:44 +0000

the ITM Debit Spreads seem to have the lowest theta or time decay i think, but the premiums are much higher too.
I feel that for me a Credit spread has a better chance of
success less risk and less profit but more winners and
less of a draw down on your margin account. Allen, does
this reply sound right to you? Michael

By: Joe B

Joe B — Thu, 18 Mar 2010 04:57:26 +0000

What about buying in-the-money debit spreads? In this case, the underlying can stay where it is, go up, or down, and you can still profit from the difference in time value of the 2 strikes. The underlying just has to stay above the sold strike (in the case of calls) for maximum profit. I haven’t tried this yet ‘for real’ but I’ve been paper trading it, and wonder if you have any advice.
One disadvantage is that you have to buy back the position at expiration and can get burned by the bid-ask spreads, and commissions.
I would love to know anyone’s thoughts or experience with this strategy! Thanks.

By: Xueren Zhang

Xueren Zhang — Sat, 07 Nov 2009 16:23:36 +0000

But according to some statistics,around 88% of options expires worthless.Therefore,for practical reason,debit call and put spreads ,even though they have advantages,still a hard game to play,unless we have at least 80% chance that the underlying security will go up or down to a certain range.Credit spread,on the other hand,may be “safer”,if we are 80% sure of strong support and resistance level.Selling put spreads with some “dead” blue chips like MCD,KO,VZ,PG are my trades since March,for income purposes.Every month,there is a selling opportunity with one of those stocks.Trendy stocks like FCX,AAPL,GS are also worth to get into,but big price swings often make me nourvous.Everytime, dropping 10 to 25 points is good time to enter selling put spreads.It is same as buying stocks at dip,if we have enough capital.Iron condors are better choices,because they are involving selling both call and put spread.OG is a fine craftsman to design SPX and RUT.I would also love him to recommend,once in a while, an iron condor to take a stock ( of course,more complicated than index ).