Debit Spread Wider vs. Narrower Spread Rule
An investor who establishes a debit vertical spread wants the difference between the option premiums (the spread) to:
Debit spread buyers WANT the spread to WIDEN and WANT the contracts to be EXERCISED. Credit spread sellers want the spread to NARROW and expire.
Complete Analysis & Legal Rationale
Memory device: 'Debit - Widen - Exercise' (D-W-E). A debit spread buyer pays cash upfront and profits when the premium difference widens towards the maximum difference between strikes, which occurs upon exercise.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Accurately identifies that debit spreads profit when the spread widens and contracts exercise.
Describes the goal of a credit spread (Credit - Narrow - Expire).
If spread remains unchanged, time decay and transaction costs result in a loss.
Buyers hold rights, not assignment obligations; narrowing hurts debit buyers.