A Debit Spread is an options trading strategy that involves buying an option with a higher premium (price paid for the option) and selling an option with a lower premium, with both options having the same expiration date and being either both call options or both put options.

For example, let’s say you want to trade options on Company XYZ, which is currently trading at $50 per share. You can create a Debit Spread by buying a call option with a strike price of $55 and paying a premium of $2, and simultaneously selling a call option with a higher strike price of $60 and receiving a premium of $0.50. This creates a spread where the option with the higher strike price and lower premium is sold, and the option with the lower strike price and higher premium is bought.

The goal of a Debit Spread is to limit the cost of buying an option by selling an option with a lower premium. If the stock price of Company XYZ rises above the bought option’s strike price of $55, the profit will increase, but the maximum loss is limited to the premium paid for the spread. However, if the stock price of Company XYZ remains below the bought option’s strike price of $55 until expiration, the spread will expire worthless, and the buyer of the spread will lose the entire premium paid.