Call DEBIT SPREADS

Discussion in 'Options' started by James.DeGori, Nov 22, 2021.

  1. Can someone suggest what the criteria is for buying CALL DEBIT SPREADS, such as DTE, DELTA etc. or point me in the direction where I may be able to read or watch something on.

    I have done searches but I mostly get explanations on what they are.

    Any help is appreciated, thanks.
     
  2. thecoder

    thecoder

    Last edited: Nov 22, 2021
  3. I was looking for something Call Debit Spreads. Thanks anyway.
     
  4. thecoder

    thecoder

    Ah, sorry, I misread :-(

    Then you need to read this page that shows which of the debit types to use for bullish and bearish situations: https://en.wikipedia.org/wiki/Debit_spread
     
    James.DeGori likes this.
  5. As always, it depends. If you're opening an ATM spread at a debit that's about half the spread width, that's basically a 50/50 bet on direction by expiration. OTM spreads are going to vary a bit more, and lean harder into direction - but they'll balance that by paying more for a smaller risk if you're right.

    A call debit spread presumes a directional assumption (bullish) and a price at/above which you believe the stock will end up by a given date. As a general rule of thumb, you'll want to choose a short strike at or a bit below that price depending on the confidence you have in your prediction; the long you buy should be defined by your per-trade risk tolerance. It's not a bad idea to check out the expected move for the stock by the date you're considering; if your expectation is very different from the market's, you should make sure that you're that much smarter than everyone else. :)

    For the most part, the greeks won't be especially influential, since your long and your short will mostly offset each other; however, there are still positions in which they'll work for you rather than against you. Debit spreads are typically short theta, which means that you'll be losing value on that spread every day - but sometimes, this can be minimized or even eliminated. Try different strikes for your long; you may end up neutral or even slightly long theta, which would eliminate that daily loss. Also, since a call debit spread is bullish and IV typically decreases as the price of the underlying goes up, you'll want to be short, or at least neutral, vega.

    If you are short theta, then make sure you're far enough out in time that it doesn't hurt you much; theta begins to accelerate around 45DTE, so you'll want to open your spread at least that far out. Again, if you end up neutral or a little long theta, this is less of a concern.

    For the rest of it, you'll just need to put on a whole lot of them and see how they work over time. There's nothing in trading that comes even close to being as valuable as real live experience.
     
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  6. JSOP

    JSOP

    It would depend on 1) the direction of where you think the underlying instrument is going and 2) its volatility (its potential price moves)

    I would strongly suggest you to read on the concept of volatility and specifically Implied Volatility; these concepts are extremely important in option trading regardless whether you trade calls or puts or their combos.
     
    James.DeGori likes this.
  7. Thanks so much that was extremely helpful. I had a rough idea, but your explanation really helped to fill in some of holes. Thanks again.
     
    BlueWaterSailor likes this.
  8. Thanks for the reply. I have an understanding volatility and Implied Vol. I am an experienced trader on the PUT side (that is what I learned first), but I really wanted to understand the criteria of the Call Debit Spread.
     
  9. JSOP

    JSOP

    It's the same thing. Debit spread is really the flip side of the credit spread so they really operates on the same principle, just from a different angle, if you want to think of it that way. A call debit spread is really the same as a put credit spread.
     
    James.DeGori likes this.
  10. I like to look at in a little bit of a simpler perspective... if the Calls are expensive (high IV) it's a good way to reduce your costs but you have to be ok with capping your upside.
     
    #10     Nov 22, 2021
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