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idk0098

why bull put spread when you can just long call

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hello noob here 

why we should use bull put spread when you can just long call they both have limited loss both in long call you have unlimited profit why limited it with bull put spread?

thanks in advanced

 

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Hi @idk0098, here are some thoughts :

 

1) Long call is theta negative whereas the bull put is theta positive (ie. the long call would lose money every day and the put spread would gain every day, ignoring any stock movement)

 

2) Long call is vega positive whereas the put spread is vega negative. If volatility was to drop, then the long call would lose, but put spread would gain - and vice versa.

 

3) Long call requires that the stock moves up (and quickly) to make a profit, whereas the bull put can make a profit if the stock stays static, or moves up, or even down a little (depending on the short strike).

 

Essentially, to make money for with a long call, the stock has to move up and quickly, whereas with the bull put spread, the stock just has to stay roughly static or rise.

 

 

With regards to the "unlimited profit" with a long call - yes, it is true, but in this is theoractical only.

 

 

Edited by zxcv64

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15 minutes ago, idk0098 said:

hello noob here 

why we should use bull put spread when you can just long call they both have limited loss both in long call you have unlimited profit why limited it with bull put spread?

thanks in advanced

 

Long call is Vega positive so IV drop can hurt, and most IVs are elevate right now and IV typically drops when the stock price rises.  So a rising stock price and dropping IV can lower profits quite a bit. A bull put spread will benefit from falling IV coupled with a rising stock price. Although a bull put spread has limited profit it can be a safer choice when IV is elevated. 

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4 hours ago, zxcv64 said:

Hi @idk0098, here are some thoughts :

 

1) Long call is theta negative whereas the bull put is theta positive (ie. the long call would lose money every day and the put spread would gain every day, ignoring any stock movement)

 

2) Long call is vega positive whereas the put spread is vega negative. If volatility was to drop, then the long call would lose, but put spread would gain - and vice versa.

 

3) Long call requires that the stock moves up (and quickly) to make a profit, whereas the bull put can make a profit if the stock stays static, or moves up, or even down a little (depending on the short strike).

 

Essentially, to make money for with a long call, the stock has to move up and quickly, whereas with the bull put spread, the stock just has to stay roughly static or rise.

 

 

With regards to the "unlimited profit" with a long call - yes, it is true, but in this is theoractical only.

 

 

I DONT KNOW HOW TO THANK YOU INSANE EXPLANATION 

UNDERSTANDS IT COMPLETLY

THANKS 

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4 hours ago, Yowster said:

Long call is Vega positive so IV drop can hurt, and most IVs are elevate right now and IV typically drops when the stock price rises.  So a rising stock price and dropping IV can lower profits quite a bit. A bull put spread will benefit from falling IV coupled with a rising stock price. Although a bull put spread has limited profit it can be a safer choice when IV is elevated. 

THANKS

 

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Remember: it's all about risk/reward. Long call has higher risk higher reward. Bull put spread - lower risk, lower reward. If you structure the put spread with both puts OTM, the stock can move slightly down and you can still make money - as long as it doesn't penetrate the short put.

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On 4/27/2022 at 9:58 AM, idk0098 said:

hello noob here 

why we should use bull put spread when you can just long call they both have limited loss both in long call you have unlimited profit why limited it with bull put spread?

thanks in advanced

 

This is good question and I agree with all the theory which yowster/zxcv64 have mentioned. They are all correct .

If you buy a call , you are option buyer with unlimited profit and limited 100% loss.

If you sell bull put, you are seller  with limited small profit  of what you got the credit for and limited loss , but typically the max spread  cost - credit. which in most cases is > 50% 

Why have limited profit, when you can have unlimited. I agree. It does not make sense to limit yourself , when you are about to win a lottery. 

Anyway , when you buy a lottery ticket , you are ready for 100% loss. If you are ready then yes,  buy a  call outright and you will be happy that you did.

I dont like bull put  or bull call and dont trade them because you are just messing around and guessing around all the time what to do with long and what to do with short.

But dont just go for theory. Think practically when you are in a trade.  

Take e.g  if today you had bought a long call , at the money ATM on say FB yesterday. You knew  that IV was highest, you paid highest IV, had highest theta  and Still got 100% return today because you won the lottery .  If you put in $1K to buy the ATM call. Today it is 2K.

Think about this , you knew FB was going to go up and earnings were strong etc etc, and you sold a  bull put  and got say credit of  $300 on spread of $1K.  You did the right thing . You sold max IV, collected max theta  and your profit was 30% of risk but just $300. 

I dont say this was bull put was less risky.  If FB went the other way,  you were on hook for 70% or $700 loss, just to make $300.  Is that worthwhile ?

There is some misconception out there that lures people to think that option sellers have edge in general. That is far from truth. That small edge you think about theta positive trade e.g in iron condor , quickly vanishes , the moment market moves  and believe me the job of market or nature of market is to move . It cannot just sit there .

By the way, I dont trade naked calls or these vertical spreads as I dont have stomach of  any loss percent above 20% to 30% max. 

 

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@Optrader In hindsight, buying FB calls turned out much better than buying bull put spread. But I'm not sure this is a good example. FB had one of the biggest post earnings moves in the recent years:

image.png

Those returns fall under the lottery ticket definition. More often the calls would be losers even if the stock moves in the right direction. 

Gain, it's about probabilities.

Call = many losers (small and big), few big winners.
Bull put spread = many small(er) winners, few big losers.

Bull put spread can make money even if you are wrong on direction (but not terribly wrong). If you have a strong conviction, go with a call, but make sure you are ready for a 100% loss, which will happen many times.

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