The Profound Difference Between Credit Spreads and Debit Spreads

Note: for additional info regarding debit and credit spreads, be sure to check out the All About Option Spreads page.

I fully admit I may be reading too much into this, but I believe there are some fascinating, even profound, differences between two very different types of option traders - net debit traders (those whose trades cost money to set up) and net credit traders (those whose trades result in an initial cash credit).

Let me be clear though. I am not asserting that all option traders fall neatly into one of two categories. I'm aware of no research (and I've conducted none myself) that would suggest this.

But I do believe, based on anecdotal observations and my own common sense, that there is a tendency among traders to be drawn more to one class of trade over another, be it net debit or net credit.

Debit Spreads vs. Credit Spreads

This is more than a question of risk tolerance. As I've said repeatedly throughout the pages of this site, just about any option trade can be made to be more risky or less risky.

Yes, the potential gains and potential losses can be significantly higher with debit spreads than they typically are with credit spreads, although admittedly that's a statement that may not hold up under much scrutiny. After all, arguably the riskiest strategy of all--writing naked calls--is a credit trade.

And don't get me wrong. I'm not saying that any option trading strategy that takes away from your cash balance is inherently more risky or speculative than a strategy that adds to your cash balance.

So risk is only one part of the equation, and a small part at that.

But I still believe there is a profound psychological difference between debit spreads and credit spreads. And to fully appreciate those differences, and their ramifications, you have to look at the structural differences between the two classes of trades:

Debit Spreads--shelling out net cash on a single or multiple leg options strategy--is not about owning something but controlling it. The debit trader recognizes the temporary uses of a tool and is under no illusions of permanence.
And there is something (Freudian, dare I say?) about investing your resources and energy in something small and then waiting for it, rooting for it, to get super big, super fast. The bigger, the better. Size is measured not in inches, but in double digit ROI.
Credit Spreads--collecting net cash on a single or multiple leg options strategy--is about another set of dynamics altogether. At some level, credit trades are always about cash flow. And cash flow is primarily about the impulse to harness and domesticate. It's ultimately motivated by the desire for cities and empires and the quest for permanence.

psychology of option trading

Am I reading too much into this? Perhaps, but I think not. Human psychology is not a confusing mess of arbitrary motivations and impulses.

We do things for reasons, even if we don't consciously understand those reasons. We are, after all, members of a species that seeks foremost two things--to perpetuate itself and to improve itself.

So why wouldn't the strategies we employ trading stock options (literal and symbolic efforts to accumulate and trade resources) reflect that reality?

The more I've pondered these distinctions, the more they've made sense to me. There's nothing magical in individual option trading strategies themselves, of course, but there is great power when you align your trading and investing strategies with your core psychology.

The more consciousness and self-awareness you can bring to trading or investing, the more success, I believe you will find.

The Leveraged Investing strategies that work for me, for example, probably won't work as well for the hard core trader.

But they might be a terrific fit for those whose natural tendencies are more credit spread oriented, and those who are drawn toward the idea of acquiring quality assets for the long term at a fraction of their true value.

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