vertical credit spreads or selling CSPs and CCs

Discussion in 'Options' started by shMark, Mar 11, 2024.

  1. shMark

    shMark

    What strategy do you think is better?
     
  2. BMK

    BMK

    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.
     
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  3. Quanto

    Quanto

    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
     
    Last edited: Mar 12, 2024
  4. cesfx

    cesfx

    I prefer verticals anytime.

    CSP and CC have the same payoff... And if the CSP is protected with a dotm long, it's a vertical.
     
  5. Quanto

    Quanto

    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

    MaxRisk_formulas.png
     
    Last edited: Mar 12, 2024
  6. newwurldmn

    newwurldmn

    Lazy question.

    Lazy answer: it depends on the pricing and your view.
     
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  7. Quanto

    Quanto

    The vertical spreads bind much less capital than CC or CSP.
    Due to this fact, the leverage with them is higher.
     
  8. ajacobson

    ajacobson

    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.
     
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  9. ajacobson

    ajacobson

    5123eYC-mAL._SY466_.jpg


    Clearly, cheap pandering
     
  10. Quanto

    Quanto

    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.
     
    Last edited: Mar 12, 2024
    #10     Mar 12, 2024