When should I use a debit spread instead of buying a single option?

Question

When should I use a debit spread instead of buying a single option?

AcadiFi · Accepted Answer

A bull call spread (debit spread) buys a closer-to-money call and sells a further-OTM call, financing part of the long call with the short call premium. For Juniper at $65:

- Buy $65 call for $2.80
- Sell $70 call for $1.10
- Net debit: $1.70 per contract
- Max profit: ($5 - $1.70) = $3.30 if Juniper closes at or above $70
- Max loss: $1.70 if Juniper stays below $65

Risk-to-reward is roughly 2:1, compared to the unlimited upside of a long $65 call. So when is the spread better than the naked call?

1. You have a specific target price. If you think Juniper will top out near $70, the spread pays out the same at $70 as a naked call would (minus the cost reduction).
2. Implied volatility is elevated. Selling the $70 call helps reduce your vega exposure.
3. You want a cheaper, defined-risk trade. The $1.70 cost is 39% lower than the naked call.

The naked call is better when you expect a very large move (say to $80+) because the spread caps your upside. On the CFA exam, debit spreads are presented as directional trades with defined risk and capped reward — a classic structured trade with known payoff diagram.

When should I use a debit spread instead of buying a single option?

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