When To Use A Bull Call Spread vs. A Bull Put Spread

February 1, 2010

A Bull Call Spread and a Bull Put Spread have similar properties.  Graphically, they are similar and they are both constructed to profit from a rallying market.

When using a Bull Call Spread, the position is a debit spread.  When using a Bull Put Spread, the position is a credit spread.  So how do we determine if we should use a Bull Call Spread or a Bear Put spread to exploit a rising market?

The choice of using a Bull Call Spread or Bull Put Spread is usually determined by the risk and reward profile each of the trades considered.

Sometimes a Bull Call Spread is the better choice, even though entered initially as a debit spread.  Sometimes the Bull Put Spread is the better choice and is always entered as a credit spread.

We are not concerned with whether a spread is a credit spread or a debit spread.  In this example, we want to see the market under review rally.

An effective way to analyze the trades is to review the best-case and worst-case scenarios, margin requirements and option “Greeks” associated with the trades.  An interesting way of analyzing profit and loss for either of these bullish strategies is to set up the trades such that the lower strike for the Bull Call Spread is the same as the lower strike for the Bull Put Spread.  Then, to compare apples to apples, select strikes equally far away from the strike price that is the same for each spread.

Once this is done, conduct a “what if” on the losses incurred resulting from a 20 point, 30, point and 40 point move against the bullish position.  We want to be able to incur an adverse price move with minimal loss.  Sometimes, the determining factor comes down to this – which spread, the Bull Call Spread or the Bull Put Spread, incurs a smaller loss given an adverse move against our market bias.

Other factors that come into play are the option Greeks, specifically Delta, Gamma, Vega and Theta.  Each trader weighs these factors differently.  Option Greeks relate to tolerances in time decay, degree of directional bias and other factors that may affect the position.

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