Look, I get asked about spreads all the time.
Credit spreads, debit spreads — when to use which, why bother with one over the other.
And here’s the thing: I use credit spreads every single week. They’re my bread and butter for income generation. But there’s a specific scenario where I won’t touch them — and that’s when I’ve got directional conviction on a stock about to make a real move.
Let me walk you through exactly why.
The Problem with Credit Spreads on Directional Plays
Say you’re looking at Gap (GAP), trading around $23, and you think it’s heading to $31. You’ve got conviction. You see the setup.
Now, you could slap on a credit spread. But here’s what kills it: The most you’re gonna make with a credit spread is how much premium you collect when you enter the trade.
There’s no upside beyond that initial credit.
If you’re collecting 50 cents on a $2.50-wide spread, that’s maybe 20% return. Not bad for a weekly income play.
But when the stock’s about to move 8 dollars? Credit spreads don’t give you a big enough bang for your buck.
You’re capping yourself at that 20% while the real move happens without you.
Debit Spreads: Better Pop When You Need It
Now flip it around.
A debit spread costing less than $200 can generate 50% returns — and the stock doesn’t even need to move 50% for you to get there. That’s the capital efficiency I’m after.
When I’m setting up a debit spread, I’m looking at a few things before I pull the trigger. I want tight bid-ask spreads — really tight. Good open interest, good volume, nice and liquid.
That tells me I can get in and out without getting crushed on the spread.
Debit spreads can give you way better pop when you’re expecting a significant directional move. So here’s my framework: Use credit spreads for consistent weekly income on your holdings. But when you’ve got real conviction on a directional play — upside or downside — I would never use a credit spread for a big expected move.
Debit spreads are the cheapest, least expensive, biggest bang-for-the-buck way to play those setups.
Trade well,
Jack Carter
Jack Carter Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
In one of his last acts before retirement, Warren Buffett has been loading up on a stock for a while now.
Coincidentally, an “Income Glitch” is set to send this stock higher.
And at 3 p.m. ET today, I’ll give you the full breakdown and the ticker…
