A debit spread, or a net debit spread, is an option strategy involving the simultaneous buying and selling of options of the same class with different prices requiring a net outflow of cash. The result is a net debit to the trading account.
Here, the sum of all options sold is lower than the sum of all options purchased, therefore the trader must put up money to begin the trade.
A credit spread can also refer to a type of options strategy where the trader buys and sells options of same type and expiration but with different strike prices. The premiums received should be greater than the premiums paid resulting in a net credit for the trader. The net credit is the maximum profit that trader can make. Two such strategies are the bull put spread, where the trader expects the underlying security to go up, and the bear call spread, where the trader expects the underlying security to go down.
A diagonal spread is an options strategy established by simultaneously entering into a long and short position in two options of the same type (two call options or two put options) but with different strike prices and different expiration dates.
Joe explains option spread strategies that help to minimize risk.
Biography
I have been a trader for over 25 years. I have been a top finisher in several international real money trading competitions. I have worked trading prop funds for one of the worlds largest institutions. I currently work for a private regulated hedge fund which is closed to new money. There is more I could say, but I think you get the idea. :).
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