Debit and Credit Spreads
The simultaneous opening of long and short positions involves receipt and payment of money. When you go short, you receive a premium, and when you go long you are required to pay. When you receive more than you pay, that also extends your profit range in a combination strategy. While it is always desirable to receive more money than you pay out, it is not always possible. Some strategies will involve making a net payment. When you make a payment to open the position, more profit is required in changed value levels to offset the amount paid and produce a net profit.
Smart Investor Tip
When a spread involves a net receipt, that broadens your profit potential; a net payment is accompanied by the requirement for greater profits in changed option premium to make up the difference.
A spread in which more cash is received than paid is called a credit spread. When you are required to make a payment, that is called a debit spread.