Debit Spread Pro

Buy one option, sell another at different strike for net cost (debit). Bull call spread (bullish) or bear put spread (bearish). Defined risk - max loss is debit paid. Profits if price moves in your direction.

Debit spread: Low IV, expecting movement, positive gamma/vega. Credit spread: High IV, expecting range, positive theta. Debit = Want move. Credit = Want no move.

Max loss = Debit paid. For £20 debit, max loss is £20. Occurs if price doesn't move in your direction and both options expire worthless or with no spread value.

50-75% of max profit is standard. Example: Max profit £30, target £15-22.50. Take profits - don't wait for max. Time decay accelerates and reduces profit.

Low IV (rank < 30%). Options cheaper to buy. If IV rises, you benefit (positive vega). Avoid high IV - expensive options and likely IV contraction.

Long strike: ATM or 1 strike ITM (higher probability). Short strike: At technical target (resistance for calls, support for puts). Width should match expected move. Debit < 60% of width.

When underwater but thesis intact. Must have > 30 DTE. Roll to later expiration. If thesis invalid or adjustment too expensive, close instead. Rolling extends time for move.

Negative theta hurts debit spreads. Time decay erodes value daily. This is why: Use longer DTE (45-60 days), exit early if profitable, cut losses if wrong. Don't hold to expiration unless deeply ITM.

Exit if position loses 50% of debit paid. Example: £20 debit → Exit at £10 value. Preserves capital. Acknowledges position isn't working. Allows redeployment to better setups.

Yes. Add opposite spread at short strike. Locks in profit if price near target. Example: Bull call 7,500/7,550 + Bear call 7,550/7,600 = Butterfly. Use when price reached target and want to reduce risk.

Analyze IV at each strike. Ideal: Lower IV at long strike (cheaper), higher IV at short strike (more credit). Net effect: Lower debit, better risk-reward. Compare market vs theoretical prices for edge.

Both strikes ITM. High delta (0.70-0.90), high probability, acts like stock with defined risk. Lower percentage return but higher probability of profit. Conservative directional approach.

Allocate by IV: Low IV (< 30%) = More debit spreads. High IV (> 40%) = More credit spreads. Middle = Mixed based on directional view. Track aggregate Greeks and directional exposure.

Multiple spreads at progressive levels (7,500/7,550, 7,550/7,600, 7,600/7,650). Benefits from strong trends. Each spread adds exposure. Use for high conviction directional views.

Limits: 3-5% per position, 15-25% total. Balance bullish/bearish. Track aggregate delta. Diversify underlyings. Exit discipline crucial due to negative theta. Review weekly.