objectives are met more efficiently by buying the spread. The goal is to
profit from the delta move down from $80 to $75. Exhibit 9.8 shows the
differences between the greeks of the outright put and the spread when the
trade is put on with ExxonMobil at $80.55.
EXHIBIT 9.8 ExxonMobil put vs. bear put spread (ExxonMobil @
$80.55).
80 Put75–80 Put
Delta −0.445−0.300
Gamma+0.080+0.041
Theta −0.018−0.006
Vega +0.110+0.046
As in the call-spread examples discussed previously, the spread delta is
smaller than the outright put’s. It appears ironic that the spread with the
smaller delta is a better trade in this situation, considering that the intent is
to profit from direction. But it is the relative differences in the greeks
besides delta that make the spread worthwhile given the trader’s goal.
Gamma, theta, and vega are proportionately much smaller than the delta in
the spread than in the outright put. While the spread’s delta is two thirds
that of the put, its gamma is half, its theta one third, and its vega around 42
percent of the put’s.
Retracements such as the one called for by the trader in this example can
happen fast, sometimes over the course of a week or two. It’s not
necessarily bad if this move occurs quickly. If ExxonMobil drops by $5
right away, the short delta will make the position profitable. Exhibit 9.9
shows how the spread position changes as the stock declines from $80 to
$75.
EXHIBIT 9.9 75–80 bear put spread as ExxonMobil declines.