Got few queries as to when to do Debit Spreads vs Credit Spreads for directional plays.
A 'Debit Spread' involves buying a near-the-money (NTM) option and selling an out-of-the-money (OTM) option, in effect paying more for buying the long option than you get the credit for selling a short option, hence the name Debit Spread.
Debit Spread should be done when you need strong directional exposure. Ideally, it should be done under low IV environments (IVP<60) so that your spread doesn't suffer from a loss if the IV drops. It will also make money when IV rises.
A 'Credit Spread' involves selling a near-the-money (NTM) option and buying an out-of-the-money (OTM) option, in effect getting more credit for selling the short option than you paid for buying the long option, and hence the name Credit Spread.
Credit Spreads should be done when you are neutral to slightly directional. It makes money if underlying is sideways or moves in your favor. If the underlying makes a strong move, it will not make money as fast as your debit spread would make (depends on strikes chosen as well)
Credit Spreads should be ideally done under high IV conditions,(IVP>80) so it will gain when the IV drops & also limit losses due to further rise in IVs.
