Bearish equivalent of Bull Call Spread
- Thread starter moolah
- Start date
Ok I just looked this up . Bull spread is buy and sell calls. It's the same thing on short side. you just buy and sell the puts on a spread
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Can you provide examples? If at same strikes for both legs in the spread, how to make money?
For example when you’re bullish you can buy a Call spread 1x$20C/-1x$25C, which can be worth $5 and you may pay for it, for example $3, so you’d make $2 profit.
OR to make the same exact money and same trade using puts, you can sell Put spread -1x$25P/+1x$20P, also being worth max $5, but instead of paying $3 like for Call spread, you receive $2 credit for selling such Put spread. (both being bullish)
The margin, profit, and everything else will work exactly the same.
Not sure what do you mean by “how to make money”. They both make money the same way, so you simply choose which way you prefer. Some people always trade call spreads for both bullish and bearish bets, others always trade put spreads, and others can trade one or the other depending on what feels more intuitive to them for bullish vs bearish trades.
Btw, you may need to review, research and understand these basics to be comfortable trading any such spreads. (aka vertical spreads)
OR to make the same exact money and same trade using puts, you can sell Put spread -1x$25P/+1x$20P, also being worth max $5, but instead of paying $3 like for Call spread, you receive $2 credit for selling such Put spread. (both being bullish)
The margin, profit, and everything else will work exactly the same.
Not sure what do you mean by “how to make money”. They both make money the same way, so you simply choose which way you prefer. Some people always trade call spreads for both bullish and bearish bets, others always trade put spreads, and others can trade one or the other depending on what feels more intuitive to them for bullish vs bearish trades.
Btw, you may need to review, research and understand these basics to be comfortable trading any such spreads. (aka vertical spreads)
Which to use depends on the position of strikes. If the legs are equidistance from underlying price, then it makes little difference.
The debit amount will mostly be determined by the price of each option, which is determined by market makers, who in turn look at the basic odds (based on past stock movement or range of movement, known as historical volatility), as well as at supply and demand known as implied volatility (IV). If there is big demand for calls then their price and IV may go higher and make the price of spreads more expensive as well.
But generally if the stock price is already reaching $20 or a little higher then the basic odds should be nearing 50/50 and the price of $20/$25 spread may be between $2-$3, depending on those other factors.
If you also include the other profit that market makers try to make then usually you’ll end up paying more than less (like $2.50-$3+).
A week later nothing happens if the options/spread are still far from expiring and the stock price didn’t move. If the stock price goes up and is at $25 or a little higher then the spread may be worth $3-$4 and continue increasing in value according to the current odds and volatilities.
In fact, the price can be estimated at any time using the same rules as above. So the spread price is always calculated using the current odds and demand at the time when you do the evaluation, whether a week earlier or later. But the time component is a part of the odds, so less time means higher odds of the stock price not moving much more and the spread being worth based on the current stock price.
I’m not looking at options chains right now but if you look at a few such spreads on different stocks then you can get good estimates of what to expect.
But generally if the stock price is already reaching $20 or a little higher then the basic odds should be nearing 50/50 and the price of $20/$25 spread may be between $2-$3, depending on those other factors.
If you also include the other profit that market makers try to make then usually you’ll end up paying more than less (like $2.50-$3+).
A week later nothing happens if the options/spread are still far from expiring and the stock price didn’t move. If the stock price goes up and is at $25 or a little higher then the spread may be worth $3-$4 and continue increasing in value according to the current odds and volatilities.
In fact, the price can be estimated at any time using the same rules as above. So the spread price is always calculated using the current odds and demand at the time when you do the evaluation, whether a week earlier or later. But the time component is a part of the odds, so less time means higher odds of the stock price not moving much more and the spread being worth based on the current stock price.
I’m not looking at options chains right now but if you look at a few such spreads on different stocks then you can get good estimates of what to expect.
Robert Morse
Sponsor
First question-simple math. In this picture, you can see the markets of the legs, the bid net value of the spread, then midpoint, the ask. The money value is on the top right at mid-point. As to the second question. After you execute the spread, your broker does not keep it as a spread but as two legs. They do provide margin offset for the spread. The value of each leg will change live throughout every trading day. You can exit whenever you want, but as to if the stock breaches a strike, that makes no difference. As long as you have enough equity in your account, you can keep your options unless you get assigned on the short side.
