vertical credit spreads or selling CSPs and CCs
- Thread starter shMark
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There's no meaningful answer to that question. Depends on many, many variables. Risk tolerance is one of them. The risk profile on covered calls and cash-secured puts is very different from a vertical spread.
But the big difference is capital.
Covered calls and cash-secured puts require a lot more capital. To write a covered call, you have to be long the stock. To write a cash-secured put, you have to have cash available to buy the stock if you get assigned. That's a lot money tied up. And in principle you could lose it all.
Vertical spreads require far less capital, and the potential loss is much lower.
But the big difference is capital.
Covered calls and cash-secured puts require a lot more capital. To write a covered call, you have to be long the stock. To write a cash-secured put, you have to have cash available to buy the stock if you get assigned. That's a lot money tied up. And in principle you could lose it all.
Vertical spreads require far less capital, and the potential loss is much lower.
The absolute MaxRisk with CC, CSP, and CS is the NetPremium,
with PS it's abs(S.K-L.K)-NetPremium, but which equals the NetPremium of CS.
In summary: the absolute MaxRisk is the NetPremium with all four (maybe except PS, depends on POV).
But, as was also noted by @BMK, the capital requirement (the cash or margin collateral) differs big, also depending on MarginAcct or CashAcct, favoring the vertical spreads over CC and CSP.
Update: the above quick analysis is maybe inaccurate/incomplete. I'll update it soon.
Abbrs:
CC: CoveredCall
CSP: CashSecuredPut
CS: CallSpread
PS: PutSpread
POV: Point of view
with PS it's abs(S.K-L.K)-NetPremium, but which equals the NetPremium of CS.
In summary: the absolute MaxRisk is the NetPremium with all four (maybe except PS, depends on POV).
But, as was also noted by @BMK, the capital requirement (the cash or margin collateral) differs big, also depending on MarginAcct or CashAcct, favoring the vertical spreads over CC and CSP.
Update: the above quick analysis is maybe inaccurate/incomplete. I'll update it soon.
Abbrs:
CC: CoveredCall
CSP: CashSecuredPut
CS: CallSpread
PS: PutSpread
POV: Point of view
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With CallSpread (CS) and PutSpread (PS) one has to differentiate between Bullish and Bearish.
The absolute risk (ie. MinPnL) in CC, CSP, CS.Bullish, PS.Bearish is identical to their respective NetPremium.
The absolute risk in CS.Bearish and PS.Bullish is different.
You can analyse them all in such an options tool like this: https://optioncreator.com/bull-call-spread
The absolute risk (ie. MinPnL) in CC, CSP, CS.Bullish, PS.Bearish is identical to their respective NetPremium.
The absolute risk in CS.Bearish and PS.Bullish is different.
You can analyse them all in such an options tool like this: https://optioncreator.com/bull-call-spread
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The vertical spreads bind much less capital than CC or CSP.
Due to this fact, the leverage with them is higher.
Variations on a theme.
It's too long for a quick answer and the devil is in the details and embedded costs of carry.
Think as a covered write and think about the stock as a zero strike -perpetual option. Now it's a funky vertical. You can't deduct the embedded carry as you can in the pure vertical. The covered write can create phantom income which kinda sucks if you're trading in a taxable account. The vertical can as well, but you can play with expiration.
CSP is a regulatory creation to facilitate unleveraged put selling.
Again the devil is in the details, but biased towards the vertical.
It's too long for a quick answer and the devil is in the details and embedded costs of carry.
Think as a covered write and think about the stock as a zero strike -perpetual option. Now it's a funky vertical. You can't deduct the embedded carry as you can in the pure vertical. The covered write can create phantom income which kinda sucks if you're trading in a taxable account. The vertical can as well, but you can play with expiration.
CSP is a regulatory creation to facilitate unleveraged put selling.
Again the devil is in the details, but biased towards the vertical.
For answering such important questions like in the OP, one must consider all factors,
especially the cost factor, ie. the margin or cash requirement.
The following site has a good table with formulas for most of the options strategies:
https://www.tradestation.com/pricing/options-margin-requirements/
But to find the final answer one needs one final advanced step: probability-weighted payoff.
I haven't compared the said strategies using this metric, but will do it soon if time permits.
Search for "probability weighted payoff" in these texts:
https://robotwealth.com/efficiently-simulating-geometric-brownian-motion-in-r/
https://www.cmegroup.com/education/...tions/options-theoretical-pricing-models.html
https://www.analystforum.com/t/probability-weighted-payoff/145491
Ie. one should create a score for each strategy to make them comparable with each other.
The score should be a composite from all the relevant metrics, incl. the above said probability-weighted payoff.
especially the cost factor, ie. the margin or cash requirement.
The following site has a good table with formulas for most of the options strategies:
https://www.tradestation.com/pricing/options-margin-requirements/
But to find the final answer one needs one final advanced step: probability-weighted payoff.
I haven't compared the said strategies using this metric, but will do it soon if time permits.
Search for "probability weighted payoff" in these texts:
https://robotwealth.com/efficiently-simulating-geometric-brownian-motion-in-r/
https://www.cmegroup.com/education/...tions/options-theoretical-pricing-models.html
https://www.analystforum.com/t/probability-weighted-payoff/145491
Ie. one should create a score for each strategy to make them comparable with each other.
The score should be a composite from all the relevant metrics, incl. the above said probability-weighted payoff.
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