The Options Millionaire Debit vs Credit Spread
Feb 13, 2024
A clear breakdown of how debit and credit spreads differ in cost and cash flow. A look at intrinsic vs extrinsic option value and why time decay helps one strategy but hurts the other. A discussion on the psychological pull of collecting credits and the risks of over-selling. Concrete payoff comparisons and practical tips for learning and paper trading.
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Both Spreads Share Defined Risk and Reward
- Debit and credit spreads both use two legs and have defined risk and defined profit.
- Both involve buying one option and selling another, which caps both potential loss and gain compared with single option buys or naked sells.
Option Premiums Split Into Intrinsic And Extrinsic
- Option price splits into intrinsic value and extrinsic (time) value, and extrinsic decay is the primary daily force for spread performance.
- Peter stresses intrinsic = strike vs price, extrinsic ≈ time value that decays as expiration approaches.
Time Decay Determines Who Has The Edge
- Time decay (theta) is on the seller's side for credit spreads and on the buyer's side for debit spreads.
- Credit spreads profit as extrinsic value declines; debit spreads need underlying movement to overcome time decay.