Credit and Debit Spread Similarities
The credit call spread and the debit call spread appear to be exactly opposite
in every respect. Many novice traders perceive credit spreads to be
fundamentally different from debit spreads. That is not necessarily so.
Closer study reveals that these two are not so different after all.
What if Apple’s stock price was higher when the trade was put on? What
if the stock was at $405? First, the spread would have had more value. The
395 and 405 calls would both be worth more. A trader could have sold the
spread for a $5.65-per-share credit. The at-expiration diagram would look
almost the same. See Exhibit 9.6 .
EXHIBIT 9.6 Apple bear call spread initiated with Apple at $405.
Because the net premium is much higher in this example, the maximum
gain is more—it is $5.65 per share. The breakeven is $400.65. The price
points on the at-expiration diagram, however, have nothing to do with the
greeks. The analytics from Exhibit 9.5 are the same either way.
The motivation for a trader selling this call spread, which has both
options in-the-money, is different from that for the typical income
generator. When the spread is sold in this context, the trader is buying
volatility. Long gamma, long vega, negative theta. The trader here has a