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Credit Spreads or Debit Spreads (12:07)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 12, No. 7 on April 10, 2003. 

A subscriber recently asked the question, “If the market is breaking down and options are expensive, would a call credit spread be the best low risk spreading strategy to use?” It’s a good question, and the answer gets into a dichotomy of sorts – in that a credit spread might not be the best strategy even when options are expensive.

It is sort of a “knee-jerk” assumption that a credit spread will do better than a debit spread if volatility collapses. In reality, that’s not true. If they both employ the same strikes, they will perform the same (otherwise, risk-free arbitrage would be available).

Option Basics: Debit Spreads (04:20)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 4, No. 20 on October 26, 1995.

Any spread that creates a debit in one's account, when it is established, is technically a debit spread. However, when the term "debit spread" is used, it generally connotes either a bull spread with calls or a bear spread with puts. These are types of vertical spreads, since all the options have the same expiration date but have different striking prices (credit spreads are vertical spreads also).