PREMIUM, DEBIT & CREDIT
Plain English
The premium is the price of an option. When you pay money to enter a trade, that's a debit. When you receive money to enter a trade, that's a credit. Simple as that.
Going deeper
The premium is the market price of an option contract. It's determined by supply and demand, influenced by factors like the stock price, strike price, time to expiration, and implied volatility. A debit trade requires you to pay money to enter — you're buying options. A credit trade means you receive money to enter — you're selling options. Multi-leg strategies can be either debit or credit. Understanding these terms is essential for knowing the cost, breakeven, and cash flow of any options position.
Examples
Debit Trade
You buy a call for $3.00. You pay $300 (a debit). This is the most you can lose. You need the option to increase in value to profit.
Credit Trade
You sell a put spread and receive $1.50. You get $150 deposited into your account (a credit). This is the most you can make. You profit if the stock stays above your short strike.