Options Education Bear Call Spreads and Bull Put Spreads

Bearcallspreadsandbullputspreadsareaniceshortpremiumwaytoplayadirectionalbias?

Ifatraderthinksthatstockisgoingdown,butdoesnthaveanstrongopiniononwhereitisgoing,forexamplenoexpectedeventmoveoratechnicallevel,thenabearcallspreadcanbeawaytoreceivecreditforthespreadifstockmovesdownatalloratleastdoesntgoup。

Ifonehasageneraldirectionalbiasacrossthemarketthiscanbeahigherprobabilitywaytotradeanumberofstocksratherthanpickingpointsforbuyingout-of-the-moneycallsorputs?

BUT,thisistrueonlyforout-of-the-moneybearcallspreadsorbullputspreads?

Letsdiscussthebearcallspread?

Anout-of-the-moneybearcallspreadisashortpremiumpositioninthesensethatthetraderwantsstocktostaystillormovedown?

Atexpiration,ineitherofthosecases,thecallspreadisworthzerosothetraderhasmadewhatevermoneyheorshereceivedfromsellingthespread?

Decayishisorherfriend?

Ontheotherhand,letslookatanat-the-moneybearcallspread。

LetslookattheGOOGDec22685/690bearcallspreadwithstocktrading$688。

80。

OptionchartcourtesyofLivevol。

Atradercouldsellthiscallspread,bidtoask,for$2。

50?

But,ifexpirationweretoday,thespreadwouldbeworth$3。

80?

Thereforewecannotthinkofthisat-the-moneybearcallspreadasashortpremiumpositioninthesenseweusuallydoeventhoughwehavereceivedmoneyforit?

Ifstockweretodonothing,wedlosemoneyonthespread?

Decayisnotourfriend。

Weneedstocktomoveatleast$1。

30downtobeintrinsicallyprofitable?

Ourmaxprofitis$2。

50ifstockgoesdownandmaxlossis$2。

50ifstockgoesupandthespreadgoesto$5?

Ifstockstaysstillwewouldlose$1。

30?

So,justanotethatwhenyouconsideranat-the-moneybearcallspreadorbullputspread,youneedtothinkaboutitalittledifferentlyandlookatyourrisktorewardandconvictionlevelconsideringtheintrinsicvalueofthespread。


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