Bull put spreads vs Bear Call Spreads

Discussion in 'Options' started by jwcapital, Apr 1, 2009.

  1. Just a recurring observation that drives me crazy. I do not like Bear call spreads, especially if I were using them alone or even as a part of IC's. When the market rises, these things really takeoff (high delta/high gamma). I find that the long call is useless in hedging the short call. When the market tanks, these spreads really tank big-time as well. But, when they reach a certain level, their value doesn't decrease (or it decreases at an incredibly slow pace).

    Bull put spreads, on the other hand don't lose value as quick as the bear call gains value in a rising market, and of course, in a tanking market, the bull put spread gains quicker than the bear call loses. So, is it better to place a bear call spread strike closer to the current market price of the underlying or is it better to just go with the bull put spread and go further OTM? You can go further OTM with the bull put spread than the bear call spread and get the same premium.

    Now, with the IC. I check my greeks periodically against my portfolio of IC's. The portfolio is typically positive delta, slightly negative or slightly positive gamma, negative vega and positive theta. In other words it looks like a short put. Also, what is interesting is that the premium received from the short call typically pays for the long put and long call.

    I think all of this is a good reason not to watch the market on a daily basis, for the greeks are dynamic, and sometimes upward movement of the underlying is preferred and sometimes the downward movemnt is preferred. Of course, as I have said before, the trick to managing the IC is to look for the exit on the profitable side ASAP. Anyway, some food for thought for those that look at the dynamics of trading options.
  2. dmo


    So, you find that bull put spreads have a "sweeter disposition" than bear call spreads? There's a reason for that.

    In a bear call spread, you are short the lower strike and long the higher strike. That position has a built-in disadvantage, because when the underlying goes up you will get longer vegas and as it goes down you will get shorter vegas. And that is unfortunate, because just as the underlying goes up and you get long vegas, IV will go down. And just as the underlying goes down and you get short vegas, IV will go up.

    With a bull put spread, the opposite is true. You are long the lower strike and short the higher strike, which has a built-in advantage. As the underlying goes up you get shorter vegas - and IV conveniently goes down. As the underlying goes down you get longer vegas - and the IV cooperates by going up.

    To really understand any position or strategy, you need to know whether you are long premium (gamma, vega and theta) or short premium. And also, you need to be aware which strikes you are long, and which strikes you are short, because that will tell you how your premium position will change as the underlying goes up or down.
  3. Call spread plus the put spread = box spread.

    I know you know this - so I am wondering if you are speaking of ONLY those situations when the call and put spreads do NOT have the same strike prices.

  4. dmo


    Sorry if I was unclear Mark. I didn't mean to be talking about being simultaneously short a call spread and a put spread which - as you say - would be a box.

    If I understood the OP correctly, he was observing that if he's short a call spread, when the market goes down he doesn't make as much as he expected, and when the market goes up he loses more than he expected. But when he is short a put spread, whether the market goes up or down, he does as well as - or better than - expected.

    I was just trying to suggest that the explanation for that lies in the relative positions of his long and short strikes - and that for equities (where the strong tendency is for IV to go down when the underlying goes up and vice versa) - it's advantageous to be long the lower strike and short the higher strike.
  5. good. didn't want to confuse the newbies.

  6. A lot depends on an issue which was not addressed, the underlying and the strikes.

    If you're trading one of the S and P derivative products the out of the money bear call spread is not that bad a position if you're a premium seller.

    Unless your strikes are spread very far apart, the deltas can be quite small and the net vega also. The beauty is the skew in IV, those out of the money call strikes fall off a cliff in IV terms when the markets rally and they helps you a heck of a lot so that the spread underperforms its delta.

    I would not look at the two scenarios as a source of frustration but more of a fact of the markets. Learn it and use it.
  7. nitro


    I am not sure what your assumptions are, but what you are saying, if I understand you correctly, has [almost] no chance of being true. If it is true, tell me the symbol and strikes and I will arbitrage it back inline for you.

  8. Using April futures options, I placed the following iron condor with the underlying (ES--multiplier is 50) at 751.50. At that point, I planned to exit the trade the Monday before expiration Friday. The VIX at the time was 43.84. The following credit IC was placed:

    P610. Received 4.25 premium. P510. Paid 1.00.
    C 865. Received 3.75 premium. C970. Paid .75. Total premium received was 6.25.

    The ES is currently at 840.5. I have closed out the 610/510 for .30. My realized profit on the 610/510 spread is 2.95. The current value of the C865 is 13.00 and the current value of the C970 is .40. The unrealized loss on this spread is 9.6. Total, unrealized loss is 6.65. Now, by the exit date, the C865 premium could plummet just with even small downward movements. Heck, even with Friday's move upward, the call's premium dropped 1.1 points. So, we will see. As far as the construction of the IC, I am sure that I will receive criticism, but this is what works for me. Believe me when I say that I do not let the underlying approach my long option. Most of the time I basically have to deal with the underlying approaching or slightly exceeding the short strikes. I am most successful just leaving the trade alone and exiting as planned. As I mentioned in another thread, I tried a different approach and turned a winner into a loser.