Call Bull spread vs Call Bear spread
Updated
A lot of traders don’t understand why when they entering a spread they don’t receive most of the money even if the stock price is going their way immediately, in this post we will see why.
A spread is a position in which we buy one option and sell another option on the same stock. All the options are Calls, with put spreads all the options are puts.
There are three types of spreads (when you buy one option and sell another, unlike ratio spread). Vertical, horizontal, and diagonal.
What you see on the charts are Vertical spreads.
Vertical – The calls have the same expiration dates but different strike prices.
From the chart: Bull spread (Left chart)->Call upper strike (sold)-> 85, Call lower strike (Bought) -> 80, the expiration date is the same on the 18 of December 2020.
Horizontal – The calls have the same striking price but different expiration dates, for example, both sold and bought calls have the same strike price of 80, but the one that is being sold ends on the 18 of December 2020, and the one that bought on the 15 on January 2021.
Diagonal – a mix of vertical and diagonal, not the same strike and not the same expiration date.
I will only show here the Vertical spreads.
In the call bull spread, the position will profit if the price will be above the upper strike price (85) at expiration, and will lose if the position will be under the lower strike price (80). The options will not be worthless so to avoid commissions the position will be closed before expiration.
We can also see from the chart that in order to close the spread early, the stock will need to do relatively big moves.
A call bull spread is a debit spread.
In the call bear spread (right chart), the position will profit if the price will be under the lower strike price (80) at expiration, and will lose if the position will be above the upper strike price (85). Under 80, all the options are worthless at expiration and all the credit will be received.
The amount by dollars, not percent that the stock needs to move to close this position early in the bear spread is lesser than the bull spread, but on the other hand, the directions are different and we should not take a position based only on this criteria.
If the implied volatility will decrease all the lines will move to the center.
If the implied volatility will increase the lines will move from the center.
In the next post, I will show the ratio spread.
A spread is a position in which we buy one option and sell another option on the same stock. All the options are Calls, with put spreads all the options are puts.
There are three types of spreads (when you buy one option and sell another, unlike ratio spread). Vertical, horizontal, and diagonal.
What you see on the charts are Vertical spreads.
Vertical – The calls have the same expiration dates but different strike prices.
From the chart: Bull spread (Left chart)->Call upper strike (sold)-> 85, Call lower strike (Bought) -> 80, the expiration date is the same on the 18 of December 2020.
Horizontal – The calls have the same striking price but different expiration dates, for example, both sold and bought calls have the same strike price of 80, but the one that is being sold ends on the 18 of December 2020, and the one that bought on the 15 on January 2021.
Diagonal – a mix of vertical and diagonal, not the same strike and not the same expiration date.
I will only show here the Vertical spreads.
In the call bull spread, the position will profit if the price will be above the upper strike price (85) at expiration, and will lose if the position will be under the lower strike price (80). The options will not be worthless so to avoid commissions the position will be closed before expiration.
We can also see from the chart that in order to close the spread early, the stock will need to do relatively big moves.
A call bull spread is a debit spread.
In the call bear spread (right chart), the position will profit if the price will be under the lower strike price (80) at expiration, and will lose if the position will be above the upper strike price (85). Under 80, all the options are worthless at expiration and all the credit will be received.
The amount by dollars, not percent that the stock needs to move to close this position early in the bear spread is lesser than the bull spread, but on the other hand, the directions are different and we should not take a position based only on this criteria.
If the implied volatility will decrease all the lines will move to the center.
If the implied volatility will increase the lines will move from the center.
In the next post, I will show the ratio spread.
Note
How it ended
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