bull call vs. bull put spread pricing

S

spreadn00b

I've been noticing that typically a bull put credit spread has a slightly better price than a bull call debit spread. For example, DEC06 BBBY, the 40/42.5 put credit spread is 2.10 for a max risk for .40. The bull call spread for the same strikes/exp is a debit of .50 (this is according to ToS at this moment). The put credit spread is a dime better and I see this more often than not.

I was curious to know the cause of this. Is it simply IV curvature or is it due to the risk of assignment on the ITM puts vs. the OTM calls? Is this something that changes as the overall market volatility rises and falls?

Thanks.
 
Quote from spreadn00b:

I've been noticing that typically a bull put credit spread has a slightly better price than a bull call debit spread. For example, DEC06 BBBY, the 40/42.5 put credit spread is 2.10 for a max risk for .40. The bull call spread for the same strikes/exp is a debit of .50 (this is according to ToS at this moment). The put credit spread is a dime better and I see this more often than not.

I was curious to know the cause of this. Is it simply IV curvature or is it due to the risk of assignment on the ITM puts vs. the OTM calls? Is this something that changes as the overall market volatility rises and falls?

Thanks.
More...

I checked out the spread on that position this morning when I read your post. There was only a 0.05 difference between the two.

Anyway, there are a couple reasons for this.

1) Early assignment of american style options.

2) Future dividend possibilities. I haven't looked to see if there are any divs on that particular ticker.

If I'm not mistaken there was a discussion on this topic on either mine or optioncoach's thread quite some time ago.
 
That's what I was thinking (early assignment risk, but didn't think about divs).

I saw the arguments regarding debit vs. credit spreads and how they are more or less equivalent, but if this aspect was discussed I missed and I apologize. I'll search a bit harder. I do read yours and OC's journals religiously.

Thank you for the response.

Quote from Cache Landing:

I checked out the spread on that position this morning when I read your post. There was only a 0.05 difference between the two.

Anyway, there are a couple reasons for this.

1) Early assignment of american style options.

2) Future dividend possibilities. I haven't looked to see if there are any divs on that particular ticker.

If I'm not mistaken there was a discussion on this topic on either mine or optioncoach's thread quite some time ago.
More...
 
Quote from spreadn00b:

That's what I was thinking (early assignment risk, but didn't think about divs).

I saw the arguments regarding debit vs. credit spreads and how they are more or less equivalent, but if this aspect was discussed I missed and I apologize. I'll search a bit harder. I do read yours and OC's journals religiously.

Thank you for the response.
More...

No problem. Just remember that if there is a large difference between the two then an arb situation exists, and you should take advantage if you have the ability and know what you're doing. If it is merely 0.05-0.10 then commiss will kill you and it is likely just the result of wider b/a spreads on the ITM options, or something like that.
 
Good point. I'm not really looking for an arb opportunity nor do I ever see it > .10 at this point. But when I'm looking to enter a spread, I'm obviously looking for the best R/R. Honestly, I could probably be more aggressive/smart like coach and make sure that every dime of my money is working for me like he does, but I'm not at that level yet.

Now I recently viewed a video from ISE about spreads and a comment made by the narrator was that he personally finds bull calls priced a bit better than bull puts and I just haven't seen that lately and wondered what I'm missing or if this historically low IV had something to do with it. He went on to say that the bull calls are not ALWAYS the best price so do your homework, but as a general rule, that's what he discovered.

Thanks again for the follow up and your journal.
 
Debit + Credit should equal Spread Width - Cost of carry for the box.

Some things to consider when choosing debit vs. credit spread:

1) Moneyness. The deltas of the options comprising the spread can have an impact on the b/a spread for each of the legs. In general, the larger the deltas, the greater the b/a spread due to the increased risk to the market maker for taking the other side of your position.

2) Direction of underlying. If you intend to leg your spread over a very short period of time then then either the debit or credit spread will be more applicable for legging in long leg first.

Good luck.

MoMoney.
 
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