Options costs and motivations

CFA Level III Derivatives
#1

Hi all,

I’m hoping that someone could help a bit with a basic options question.

As the price of calls with low exercise prices is more expensive than ones with high exercise prices… and puts with high strikes are more expensive than low strike puts…

For, say bull call spreads, there is an intial cost (as long call with low X and short call with high X). From what I understand, this is done when you expect an increase in prices, but the sale of a short call with a high X willl cheapen just going long the low X call. So, for bull put spreads, there is an intial inflow, and you benefit from upside. So, why would you do a bull call over a bull spread when it has an intial cost and both have the same expectations (of the prices going up)?

I guess the same applies to bear calls and spreads… there is an inflow with bear calls and and an outflow intially with bear put spreads.

Thanks!

#2

Not quite sure what you are asking. Compare bull call spread and bull put spread?

Ideally they are equivalent, but in reality, they could be different due to quoted spread, mispricing, and etc. Put call parity may not hold.

In addition to the initial cost, there are also risks to be assigned when price rises too high or falls too low.

#3

i dont think i have asked a question that is this unclear yet, and i dono if you know me, but i am dislexic, i cant spell, english is not my first language, and i just dont bother think about what i type

#4

Tiredness… that’s my excuse.

Yours?

#5

You are assuming the “price going up” means the same in both cases. Just because two structures are bullish doesn’t mean their payoffs are the same at every point.

#6

If you think about your strategy of using puts to create a bull spread you would still pay initially.

Bull spread (using calls): Buy lower strike call, sell higher strike call. Higher call strike costs less than lower call - so net pay = higher strike price - lower srike price

Bull Spread (using puts): Sell lower stirke put, buy higher strike put. Higher put strike costs more than lower put strike - so net pay = lower strike put - higher strike put

Both of these are a net outlay.