KFE, can you explain what you see in a call credit spread that you find attractive?
McMillan pretty strongly recommends against them, saying that an equivalent put debit spread is a much better strategy.
Here is what he has to say:
"Put bear spreads have an advantage over call bear spreads. With puts, one is selling an out-of-the-money option when setting up the spread. Thus one is not risking early exercise of his written option before the spread becomes profitable. For the written put to be in-the-money, and thus in danger of being exercised, the spread would have to be profitable, because the stock would have to be below the lower striking price. Such is not the case with cal bear spreads. In the call spread, one sells an in-the-money call as part of the bear spread, and thus could be at risk of early exercise before the spread has a chance to become profitable.
Besides this difference in the probability of early exercise, the put bear spread holds another advantage over the call bear spread. In the put bear spread, if the underlying stock drops quickly, the spread will normally widen quickly as well. This is because -- as has been mentioned previous -- put options tend ot lose time value premium rather quickly when the go into-the-money... Call bear spreads often do not produce a similar result on a short-term downward movement. Since the call bear spread involves being short a call with a low4er striking price, this call may actually pick up time value permium as the stock falls closer to the lower strike. Thus, even though the call spread might have a similar profit at expiration, it often will not perform as well on a quick downward movement...
Some investors still perfer to use the call spread, since it is established for a credit and thus does not require a cash investment. This is a rather weak reason to avoid the superior put spread and should not be an overriding consideration. Note that the margin requirement for a clal bear spread will result in a reduction of one's buying power by an amount approximately equal to the debit required for a similar put bear spread... Thus the only accounts that gain any substantial advantage from a credit spread are those that are near the minimum equity requirement to being with. For most brokerage firms, the minimum equity requirement for spreads is $2,000."
Is there something in particular about the current market conditions that negates the natural advantage of the put debit spread over the call credit spread?
BTW, I STRONGLY recommend that anybody anticipating trading spreads read McMillan! Again, and again, and again... |
