What Is a Debit Call Spread & How to Trade Them?

  • April 2, 2019

Watch our video on how to trade a debit call spread.

What Is a Debit Call Spread & How to Trade Them?

  1. Here's what a debit call spread is and how to trade them:
  2. Also known as a bull call spread.
  3. It is a bullish directional trade.
  4. Consists of buying a call and selling another one OTM.
  5. Helps to manage risk over buying a naked call.

A debit call spread is another advanced options trading strategy also known as a bull call spread. Options trading is a popular way to trade without having to risk a lot of money.

When traders are wanting to learn how to invest in the stock market with little money they may consider options. Options trading is risky so if you decide you want to trade options, you must study.

Options have a lot more moving parts then shares do. There's time value, intrinsic value, open interest and implied volatility that affect stock price. Read our post on the implied volatility formula and it's meaning.

1. Basics: Debit Call Spread

The debit call spread (bull call spread) is one of four vertical spreads. Vertical spreads can be bullish or bearish as well as credit or debit. ​We're focusing on the bull call spread which is a debit spread.

A debit call spread is made up of two calls with the same expiration date but different strike prices. There's a short call and a long call. The short call has the higher strike price then the long call.

Read our post on put and call options explained to learn the difference of calls and puts.

This means the bull call spread always requires a debit. You're paying money initially. The purpose of the short call is to help pay for the cost of the long call.

A bull call spread is used when you're expecting a moderate rise in price. If you're expecting a large move in one direction then going with a naked call is the better strategy.

debit call spread

2. Outlook of Bull Call Spread

Options have expiration dates which limits the time you have. With this type of spread you want price to be in an uptrend. It's a lot like buying a single call option.

You need to pick a direction. In this case, with a bull call spread, you want price to go up. It doesn't mean it has to be a long term uptrend. Sometimes just holding for a few days is the best way to trade debit call spreads.

One of the greatest uses of options is the ability to make money in any market. Whether the market is bullish, bearish or trading sideways, there's an options strategy to use.

The bull call spread happens to be a strategy when you're bullish. However, the outlook should be more focused on the short term than the long term.

3. Profit Potential and Risk

If you've ever purchased a naked call or put, you'll notice that profit potential is, many times, listed as unlimited. With the debit call spread however, the the profit potential has a cap.

Don't let that scare you away from trading the bull call spread. The risk of the trade is also a lot more limited than a single call or out would be. The max loss is is the cost of the purchase.

The worst that can happen is that price trades below the lowest call price in the debit call spread. Then the contracts would expire worthless. However, since the short call helps to pay for the long call, the capital you used for the trade isn't much.

The max profit is the difference between the two strike prices. Profit increases as the stock's price increases. However if price goes above the long call strike price, the profit doesn't keep going up.

​Profit is capped because of the spread strategy. If you're trading options for a living that's not a bad thing because the risk is limited. Any time you can limit your risk, that's a good thing.

Getting too greedy for profits usually results in losing more than winning. Spreads can help to keep greed in check and that does more for growing your brokerage account then getting $1,000 a trade.

Debit Call Spread

Do You Let Debit Spreads Expire?

  • Do you let debit spreads expire? If you do not close your debit spread by expiration and you are in the money then you'll be assigned the stock. If you don't want to be assigned then it's best to close out your trade before expiration. If you don't close your trade and it's out of the money then your contract will expire worthless.

1. Trade the Patterns

Just like with any trading strategy, you should trade the patterns. The patterns help determine a direction which is necessary when trading.  If you're buying a bull call spread (debit call spread) you have a moderate bullish bias.

You wouldn't want to open a bull call spread with head and shoulders patterns or double top patterns. That's how you'd lose on the trade even if it wasn't much.

However, if you saw bullish homing pigeon patterns or triple bottom patterns then you'd know a bullish trend is on it's way or here.

Patterns give you the best setups to trade. Learn them, study them and practice them. Knowing patterns is the foundation of successful trading. Guessing when you place a trade is the best way to empty your account.

2. Practice the Bull Call Spread

​Options have many moving parts to them. As a result, trading a debit call spread is going to take practice.

Open a simulated trading account. We love using ThinkorSwim by TD Ameritrade. They have a great paper trading platform. As a result, you're able to practice buying and selling bull call spreads.

You'll notice that with the options chain you don't see debit call spreads or bull call spreads. They're under vertical spreads.

Hence why practicing is necessary. You learn these things before using real money. As a result, you work out the kinks so when you go live, you're better prepared.

You can buy and sell spreads. That changes the bias you enter the trade with. As a result, you need to practice. Learning how to to trade the debit call spread gives you the ability to profit in a safe, protected manner.

The Bottom Line

A debit call spread, consists of two call option contacts. One call is bought at the lower strike price. The other call is sold at the higher strike price, and the strategy is bullish.

As a result, the long call helps pay for the trade. The higher price goes the more the spread profits. Profits are capped when price reaches the short option price. Be sure to read up on diagonal spreads for another take on options trading strategies 🙂

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