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