When trading options you have lots of strategy choices available. Two of the more popular strategies for bullish stocks are bull put spreads and bull call spreads. These strategies are lumped into the family of ‘vertical’ spreads and are nearly identical in their theoretical reward, risk and behavioral expectations. What makes them different is when a trader builds them with different delta’s. In this article, I”m going to describe the different characteristics between the Debit Vertical and Credit Vertical when you follow traditional rules.
A Bull Put Spread is built by selling a put option and then buying a lower strike put option in the same expiration month. The structure of the trade is by definition a credit spread. Credit spreads require margin to make the trade, the appropriate trading level from your broker to begin with and a margin trading account. When you trade a credit spread you receive money up front, thus you have limited profit potential. Your risk is limited as well.
A Bull Call Spread is built by buying a call option and then selling a higher strike call in the same expiration month. The structure of the trade is a net debit which means you spend money to buy it. Trading Bull Call Spreads requires a margin account, options trading authority and the appropriate trading level.
Simply stated, the bull put spread is lower reward but has a higher probability to actually succeed. Whereas, the bull call spread has higher reward but is lower actual probability of succeeding.
Neither spread by definition is ‘better’ than the other. It comes down to your expectation from the stock. If you want cushion and high probability then go with the bull put spread. If you want higher reward and believe the stock will run then go with the bull call spread. It’s like having a few cars in the driveway, one is a performance speedster (bull call) the other is a reliable sedan (bull put). Do you want to cruise down the highway safely or hit the gas and drive fast?
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