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Equivalent Positions

It may sound simplistic to say this, but it is important for rookie traders to have a good feel for the positions they own. Of course everyone sees his/her specific position, but many times the investor has a better feel for the risk/reward profile for any position by looking at it from an alternative perspective.

For example, the simple collar position seems to be a nice, safe, conservative position. And it is. However, if you own such a position, I believe that looking at it from a different perspective would give you a clear picture of the position that you “really” own.

Collar Example

    Long 100 shares of XYZ, currently trading near $100 per share
    Long one XYZ May 95 put
    Short one XYZ May 105 call

Equivalent position: Short one put spread

    Long one XYZ May 95 put
    Short one XYZ May 105 put

If you are not yet aware that owning a collar is equivalent to being short a put spread, read the discussion and proof at my site.

In my opinion, when you look at a position that shows which put you are short, you have a good understanding of how the position loses money: Obviously when the stock price declines from its current level ($100). Although the collar owner may be similarly aware of risk, it is possible that the 3-legged spread is too complex and the true risk/reward picture may not be clear.

The reason this concerns me is that investors who would benefit from using collars tend to be stock investors who adopted the collar to gain some portfolio protection. They are not typically “traders” who use, and understand, how options work.

More than Collars

My emphasis is always on education for newer option traders, and the importance of understanding how some positions can be equivalent to others is a topic that is worth repeating.

Additional posts on this topic:
Covered Calls and cash-secured naked puts
Introduction to equivalent positions
More on equivalent positions
Yes, equivalent positions are equivalent

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Exercising call options for the dividend

Some myths die hard.
Some never die.

Here’s a comment from a reader:

I read a few of your online articles about when call owners should exercise to capture the dividend. It sounds like it makes sense, but I can’t reconcile this information with other material I read online such as:

Person A:
“I find, if a covered call has even a penny less than the dividend being paid [in time premium], I can be assured of exercise.”

Person B:
“I recently shared with a friend my frustration over early covered call assignment at ex-div. I have been called out early several times. The most recent time was on CTL. I had a call over a month out that was assigned early. That nice dividend was gone.

My friend put me in touch with a Dow Jones Newswire reporter who is writing a Wall Street Journal article on call volume spikes at ex-div….and the guy on the short side of the call.

He asked me to post his info for anyone who would like to tell of their own experience and frustration.”

Person C:
“You sound like you want have your cake (the time premium) and eat it too (the dividend). I think you should accept it as a virtual certainty that you will be assigned when coming into x-date if the time premium remaining is less than the amount of the dividend. Why would you expect that the holder of the contract you sold (the buyer) not want the dividend for himself? Since that person is usually a market maker (with a very low cost of doing business, including cheap commissions and a low cost of margin capital) you will usually be assigned.

If you get to just before x-date and you think you will be assigned you can always enter a spread order to roll the option to one less likely of assignment.”

Person B:
“I’ve traded CC’s for a long time but new to trading for the dividend income.
The CTL option was over a month out so I really didn’t think much about early assignment. I won’t make that mistake again.”

Person D:
“For stocks with large dividends, a call-holder will often exercise the option in order to capture the dividend. This will be done when the option is in-the-money and the Intrinsic value plus the forthcoming dividend exceeds the time value of the call.”

Perhaps these call owners are being exercised, but not for the reasons they think and only Wolfinger is correct?

Some people refuse to believe – despite the evidence

There are people on this planet who do not believe man has ever gone to the moon. There was a time when ‘everyone’ knew that the earth was flat – before discovering, and finally accepting, the truth.

The people you quote are wrong. And it is so easy to demonstrate that they are not only wrong (as anyone can honestly be), but they are stubborn and do not allow the facts to get in the way of their ideas. And you can prove this for yourself.

Person A is not telling the truth. I refuse to believe that he was assigned on a call option with 49 cents of time premium – when the dividend was 50 cents. In fact it doesn’t matter how big the dividend was. If assigned with that much time premium, it was a gift. It was free money. But person A does not understand how options work and discarded his gift.

He has probably never been assigned on an option with any time premium remaining, but this is impossible for me to prove. However, what I can do is prove that he is either the luckiest trader on the planet or just not telling the truth.

      :You can find real world scenarios, but I’ll make do with a fictional example.

      I used the calculator made available by the CBOE and

      Stock price: $53
      Expiration: April 15
      Dividend is $0.50
      Ex-dividend date: April 1, or 14 days prior to expiration
      Volatility = 35
      Value of March 50 call (on March 31, the day that the option must be exercised to collect the dividend): $3.27

      Note that the call has $0.27 of time premium remaining, and the delta is 84. Those numbers tell anyone that this call should NOT be exercised to capture the dividend. The downside risk is simply too great.

      When you exercise a call, you are buying stock and selling a call. That combination of trades is equivalent to selling a put – same strike and expiration date as the call exercised. And you sell it for zero, collecting the dividend as the only payment for that put.


The former call owner now owns stock, will collect the $50 dividend, and has something he/she did not have before the exercise: considerable downside risk. The stock is $52.50 (when the stock opens unchanged, it is lower than the previous close by the amount of the dividend.

The former stockholder, who is rejoicing – not complaining as your sample traders do – finds that his/her position is gone. That trader has collected all the time premium in the call option (removing all downside risk), but did not collect the dividend.

Instead, your former stockholders are bemoaning bad luck. All they have to do is open the EQUIVALENT POSITION (to the one held before being assigned). They do that by selling the equivalent put option. [If you are not aware that being short the put is equivalent to owning a covered call position, read this]

What is the value of that put?

In this scenario, volatility is 35, the stock is $52.5 and there are 14 days remaining before that put option expires.

    The put is worth $0.62. In other words, the person who was denied the $50 dividend can probably collect $60 for the put. The trader is better off by $10. That is truly free money. And the best part of being assigned that early exercise notice is that it’s not necessary to take the risk. The trader can be happy to have lost the dividend but be out of a risky position. It a choice: Take the free $10, wait for a higher price for the put (risking loss of the sale if the stock rallies), or be safely out with a profit.

This is not a bad choice. This is not something about which to complain. The people who are crying over the lost dividend never understood options well enough to consider selling the put. In reality they do not understand well enough to be using real money to trade options. Feel free to tell any of them that I said so.

Tristan: This explanation is basic to understanding options and how they work. If you don’t completely understand, please, think about it carefully before submitting a follow-up question. Understand this concept, and you are on your way to being a trader.

Trader B

Some options should be exercised for he dividend, even when one or two months remain. They are low volatility stocks paying a substantial dividend. To prove to yourself that volatility matters, look at the above example using a volatility of 18 instead of 35. You will discover that it’s (almost) okay to exercise. And most people would, even though it is theoretically not quite safe enough.

Person C

There’s not much to say. He talks big, but is option ignorant. The market maker would always sell the put instead of exercising. Any time the MM can get more than $50 for that put, it’s free money – when the alternative is exercising.

He is correct that if assignment is not what you want, rolling is one way to avoid it. But in given scenario, you should want to be assigned. It’s exactly the same as being given a free put option. You may keep that put (hold no position) or sell it.

Trader D

He would have been ok, if he had stopped sooner. His first sentence is true. The second is gibberish.

Tristan: Wolfinger is not always right. Nor is everyone else always wrong. You merely quoted four people who know not of which they speak/write.

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Condors vs. Iron Variety

Mark: If you will, address an options trading question (maybe a rookie question) to which I’ve never found an answer.

What is the benefit of selling iron condors (bull put spread/bear call spread) over buying condors (bear spread/bull spread – puts or calls, but not both)? The profit/loss graphs of the IC and the condor are identical. Clearly, with the IC the cash remains in your account and is increased by the premium collected rather than paying for the condor and collecting a profit (hopefully) later on, but the interest earned on the funds is, at least presently, negligible. Also, it appears that there might be a slightly greater premium for an IC over a condor, but I don’t have enough of a statistical sample to draw that conclusion.

So, why are iron condors so popular while non-iron condors are rarely mentioned? Thanks, as always, for your wisdom.


That’s a very interesting question and the truth is I don’t know.

I believe it’s a trader mindset. I believe that most traders prefer to have the cash in their account (iron condor), rather than pay cash for a position (condor). In this situation, the positions are equivalent and there is no theoretical advantage to trade one over the other.

However, there is a practical consideration. Because the trader anticipates that all options will expire worthless (obviously only when the trade is held though expiration), there is an extra reward for winning: There are no exercise/assignment fees to pay.

When the condor buyer wins, one of the spreads is completely ITM while the other is worthless. That requires payment of one exercise fee and one assignment fee. We know that some brokers do the right thing and provide exercise and assignment at no cost to the customer. However, that is not a common situation. Thus, all things being equal, the iron condor is better by the amount of fees saved.

More on mindset

Covered call writing is very popular among rookie traders. It’s easy to learn and nearly all brokers allow their novice traders to adopt that strategy. Selling cash-secured puts is the equivalent strategy, and adds cash in the trader’s account, but most brokers don’t allow their beginners to make that play. That’s true despite the fact that the trades are 100% equivalent.

Where does trader mindset come into the picture? I can’t be certain, but I feel that most traders who get used to writing covered calls never make the effort to switch to selling puts – even when their broker would give them permission. There is a certain comfort in trading a familiar strategy.

I believe it’s the same with condors. More books are written on iron condors, more bloggers use iron condors as topics, and thus, people who adopt this strategy begin with the iron condor and never make the change.

In the condor case, it’s correct not to make the change, but writing covered calls is not a good idea when the trader understands the equivalence of selling cash-secured puts. What’s the edge? Fewer commission dollars per trade. To me, the other, and more important point is that it’s far easier to exit prior to expiration. when the stock rises above the strike, OTM puts become cheap (eventually) whereas it’s not easy to trade ITM, higher priced call options as a combination with stock.

Exiting not only locks in the profit, but it frees cash for another trade.

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Buying Call Spread vs. Writing Covered Call Calls


I enjoy reading your blog for quite some time now. I’m very glad I found it as it helped me clarify a lot of things regarding options. So thank you for that education.

Because I wanted to know more details especially for risk management and proper trade execution I recently bought your two books Create Your Own Hedge Fund and The Rookie’s Guide to Options. In both books you are explaining conservative strategies as Covered Call, Collar and Writing Cash Secured Put.

I’m trying to test them via Paper trading. However I would like to ask you something related to cash secured puts. When you enter this trade you are bullish. As with covered call you are carrying significant risk when market goes down.

You don’t have to be bullish. All that’s necessary is that you are not bearish. Neutral markets are also good for these strategies. But yes, there is downside risk. No question about that.

One way to protect against such “big” loss seems to me might be to enter vertical bull spread instead. I guess this will be somehow counterpart of collar for call side. I’m wondering why such strategy is not listed in the conservative list of strategies. Is it because it is not income efficient or I’m I missing some other point?

You are not missing anything. If you buy a call spread, (or sell a put spread with the same strike prices), that is equivalent to a collar – same risk, same reward – but much easier to trade. It’s apparent that you already understand that.

The reason this idea was not included in the earlier book (Create) is because of what I was trying to do with the book. The idea was to get readers started using options. I decided that including many examples would be better than adding additional strategies. There is another reason. Many brokers consider spreads to be ‘complex’ and ‘complicated’ and they do not allow their less experienced traders to use spreads. Ridiculous, I know. However, that’s the way it is. So I kept it simple in the first book. In the Rookie’s Guide, the chapters on equivalency and credit spreads make it clear that these trades are all equivalent (sell put spread, buy call spread, buy collar).

The reason for not including ‘debit spreads’ and only writing about ‘credit spreads’ is that the vast majority of traders prefer the spread in which they collect cash, rather than spend cash. We know they are equivalent trades, but sometimes certain trades just ‘feel better’ – especially when the trader has not yet learned that the trades are essentially interchangeable.

I agree that adopting one of these spreads is far (far) less risky than the covered call or cash-secured put. The reward is also less, but I believe it is a good trade-off to take the safer route.

Based on stated above I “tested” such approach last Friday on weekly option with Ford stock (Friday close price 16.27). I sold “Feb 4, 16P” for 0.16 and bought protection “Feb 4, 15P” for 0.03 (i.e. net credit 0.13 which is 0.8% of 16 strike price with DP – downside protection, or downside break-even, 15.87 for week. In theory, for a month I can get 3.2% ROI on weekly – I know this is ideal thinking but much better return than regular monthly option approach. On monthly Feb 18 and same strike bull spread I would get 0.27 credit (all related to Friday prices). If I use naked put on Feb 18, then I would select the 15P for 0.15 because of better DP – 1.15USD.

Yes, Weeklys offer a better return. But that should not surprise you. The less time in the life of any option, the more rapid the time decay and the greater the risk – if the stock moves toward and then through the strike. One month options offer a better return than longer term options. Thus, Weeklys offer a better return than ‘regular’ front-month options. This higher annualized reward does come with elevated risk, so it is not for everyone. Weeklys have become very popular quickly. Buyers like the cheap ‘action’ and sellers like the rapid time decay. If you are comfortable with holding these trades, then there’s nothing wrong with trading Weeklys. I know it’s a paper account, but if you treat it as if it were real, you will learn a lot about how comfortable you feel with those trades.

Do you think I’m picking only “penny/dimes” on this approach? Do I risk too much from your point of view?

No. If you want to trade Ford, only 1-point spreads are available and it is far more important to trade the stock you want to trade (F in this case) than to worry about other considerations. I believe you are making reasonable and effective trades. Just remember that your long-term results are going to depend on how well you manage risk. There is absolutely nothing wrong with selling a $1 spread for that 13 cents. I object to ‘picking up dimes’ by selling a 10-point spread for thirteen cents, but when it’s a one-point spread, that’s equal to collecting $1.30 for a 10-point spread. That’s fine.

Additional question related to it. Is it good to use weeklies on collar/covered call/cash secured put strategy (I’m using IB so commissions on trade are not that significant to overall trade price) – my thinking about weeklies is to address possible steady declining market which makes “proportionally” less move over week than over month?

‘is it good’ to use Weeklys (note the odd spelling)? It’s acceptable is you prefer to trade short-term options. There is nothing ‘bad’ about it. However there is higher risk (gamma explodes when the stock approaches the stock price). Too risky for me, but we each define our own comfort zones.



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More on the equivalency of covered calls and naked puts

A regular commenter, semuren, recently offered a comment that made an important contribution to a discussion:

"while what you say about naked puts being equivalent to covered calls is correct, there is a big issue here. In general people trade naked puts differently than they trade covered calls. Most sell a slightly OTM call for a covered call or an OTM put as a naked put.

Those are not equivalent and that is why people view these two strategies as different. In the end it is all about practice, how people actually do things, not about ultimately correct notions. But I do not want to go off on a discussion of epistemology in the social sciences so I will just leave it at that for now."


I have often stated, and sometimes offered proof, that the two option strategies: writing covered calls and selling cash-secured, naked puts are equivalent.

When positions are equivalent, the profit/loss profiles are identical.  In the real world, the pricing of options may allow one strategy to offer a slightly higher profit than the other, but that can be ignored for a theoretical discussion.

The one qualification that I mention is that the covered call and put must have three characteristics in common:

  • Same underlying asset
  • Same expiration date
  • Same strike price

For example, when the stock price is 38, that means that writing the Nov 40 covered call provides the same result as selling the Nov 40 put.

That statement remains true.  But in a practical sense it's not helpful to the majority of  individual investors/traders.  If it's true, why is it not always helpful?

As semuren mentions, most people who adopt these strategy are oblivious to the concept of equivalent positions, and tend to sell options that are out of the money.  There is a good psychological reason for doing so.

Traders, especially inexperienced traders, get a certain satisfaction out of seeing the options they sold expire worthless. Such results are 'pleasing' because a trade was made and completed profitably. To many traders, that's all that matters. It gives the trader a psychological boost.

The fact that the trader may have lost money on the overall position (example, sell a covered call, collect $200 in premium, and lose $500 when the stock price declines) is ignored.  The satisfaction comes from earning money on the call sale.

The experienced trader does not look at writing covered calls as two separate trades. It's a single position and the trader manages the position and its risk accordingly. This trader  understands that a loss has been taken and that there is no psychological boost in that.

Nevertheless, Options for Rookies is designed to guide beginnes towards making good investing/trading decsions, and the equivalency of covered calls and selling cash secured puts is important.

Expiring worthless

Because of this preference to make a trade in which the option expires worthless, both trades are most often made by writing OTM options.

Thus, the covered call writer sells the Nov 40 call and the put seller writes the Nov 35 put.

Those positons are not equivalent.  Although the equivalency issues is very important in understanding how options work, in this example, it's not really an importance trading principle to the rookie trader. 

That's because that rookie seldom considers selling the Nov 40 put.  In this trader's real world, the trade choices are the Nov 40 covered call and the Nov 35 put sale.

Again, it's crucial to an options education to understand equivalence.   However, there are times when theory gets in the way and may confuse a new trader.


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Covered Calls and Naked Puts Revisited

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When a rookie trader first becomes aware that some positions produce identical profits and losses, regardless of the price of the underlying asset, it's truly an 'aha' moment. 

It's as if a veil has been lifted and the world has become a brighter place.

  Because I believe this is an important concept and truly enhances a rookie's ability to understand options far more quickly, I devoted a chapter to the concept of equivalent positions in The Rookie's Guide to Options.  I also  provided a solid introduction to the topic in some earlier posts.

Because the primary purpose of this blog is to provide an education to option rookies, let's take a closer look at two different strategies: covered call writing and naked put selling.

But first a word of caution:  These two strategies are most beneficial to investors whose only investment experience consists of owning a portfolio of stocks, mutual funds, or exchange traded funds (ETFs).  Each of these strategies is a less risky method for investing in the stock market – when compared with owning stocks.  The investor earns a profit more frequently, loses less often and does well when the market rallies, trades in a narrow range, or even when it undergoes a small decline.  In each of those scenarios the covered call writer and naked put seller outperform their counterparts who simply own stock.

However, these are considered to be 'not-so-safe' strategies.  If the market tumbles, losses can be sizable.  In that respect, losses are similar to (but smaller than) losses incurred by thsoe who own stock.  And upside profits are limited, whereas the investor who owns stock has the potential for unlimited gains.

Nevertheless, these are both very popular strategies because they are safer than owning stock and offer an investing style that is easy to learn.  I use these strategies to introduce rookies to the world of options.  Once these methods are well understood, then I move on to less risky plays.


If the simple algebra used in the proof that these methods are equivalent was not enough proof, let's take a look at the profit/loss graph for a pair of equivalent positions.  Although this is not strictly 'proof' I hope that seeing identical graphs goes a long way towards convincing you that these positions truly are equivalent.

Previous posts offered more details about covered call writing and naked put writing ('write' has the same meaning as 'sell' – when the investor is not selling an option that was bought earlier).

To be equivalent, the option part (the call or put option that is written, or sold) of each trade must have these elements in common:

  • The same underlying asset
  • The same strike price
  • The same expiration date

Risk Graphs

APPL Jan 300 covered call


AAPL Jan 300 naked put

These graphs are essentially identical.  Any minor difference occurs because the price of the trade execution always plays a role.  Our discussion is based on the assumption that neither trade is made at an advantageous price over the other.  

Interest rates are very low, but it does cost more to carry the covered call position (cash required to buy the position) than the naked put (cash collected when selling the put) and thus the CC should appear to be slightly more profitable by the cost of owning the position through expiration.

One myth that can be destroyed here is that a naked put is riskier than a covered call.  The positions are equivalent.


Other positions

These are not the only two option positions that are equivalent.  Keep in mind that calls are puts and puts are calls (all a trader has to do to convert one to the other is add stock – long or short – to any position).


Free e-books by Mark Wolfinger:  There is a shopping cart, but the cost is zero.

Sampler Version of the Rookie's Guide to Options

Introduction to Stock Options: The Basics

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Trading SPX Shares

Options for Rookies Home Page


Question on the SPX. Can one buy the SPX outright in place of buying SPY
ETF? Not the options but the SPX itself. If I wanted to allocate
$20,000 into the S&P 500 in a taxable account I could just buy 20
SPX contracts (assuming the SPX was at 1,000). If so, would this qualify
for that 60/40 tax treatment if sold at a gain even if the options aren't



Hi Ann,

You cannot buy 'SPX' in the sense that you can buy shares.

The best you can do is buy an index fund that comes very close to mimicking the performance of SPX.  One such a fund is the Vanguard S&P 500.  You simply buy $20,000 worth of shares.  However, this is a (low fee) mutual fund, and not what you truly want to own.  It's nearly what you want, but so is SPY.

Yes, if you buy SPX calls, you get 60/40 tax treatment. 

But please (PLEASE) remember that when you buy calls you are not 'investing' in the index in the typical meaning of the word.  $20,000 worth of calls may expire worthless while SPX remains unchanged.  You apparently want to own shares – and that is VERY different from owning call options.  

If you can meet the margin requirement, and if your broker allows the trade, you can buy calls and sell puts.  The puts and calls must have the same strike price and expiration date.  That is exactly equivalent to owning shares, except they you do not collect any dividends.

The fact that you may be ale do this does not suggest it is a good idea.  You can easily lose the entire investment.

Let's look at ATM (at the money) options.  If you buy 2 SPX Oct 1070 calls and sell 2 SPC Oct 1070 puts, your would own a position that behaves the same as owning 200 shares, or $21,400 worth of a portfolio that is based on the S&P 500 Index.  This trade would cost a small cash debit (but a much larger margin requirement). 

At expiration, these cash-settled options would be worth the closing value of the index, and you would have a profit or loss based on owning 200 'shares' of SPX with a purchase price of $1,070 per share.

If SPX > 1,070, then you get the intrinsic value for your calls – in cash.  With SPX = 1100, the calls are in the money by 30 points each, and your account gets $6,000 in cash.  That's the profit you would have earned if you could buy 200 shares at $1,070 and sell them at $1,100.

If SPX < 1,070, your calls have no value, and you would have to pay cash because you are short the puts.  A closing price of 1020 means you would owe $10,000, and the value of your investment would be the remaining $10,000. 

When you own shares and it declines by 50 points, you lose 50 X $100 per point, per 100 shares. That's $5,000 per 100 shares, or $10,000.

Note:  If SPX declines by 100 points, you lose your entire investment.  Not only that, but as the value declined, you would get margin calls and possibly be forced to liquidate at an inconvenient time.

You did not state why you want to buy SPX 'shares' – but if it is to save commissions on buying SPY shares, that's not a good enough reason.


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Option Spread Terminology: Confusion. Bull Call Spread vs Bull Put Spread

To my readers:  This is one of those lengthy, extra-detailed posts designed to proved a good answer to Carl's question.  I know the information is top-notch.  What I don't know is whether it's just too much.  I'd appreciate a bit of input:

Hi, Mark!

I’ve several questions about bull and bear vertical spreads

1) First off, the confusion factor arises from the fact that any vertical,
bull or bear, can be placed using all Calls or all Puts.

2) What is the best way to place a bullish vertical BELOW THE CURRENT PRICE
(using Puts or Calls)? Please develop this out with a couple of
scenarios with the pluses and minuses for each.

3) Which bullish vertical will be most likely to be assigned? Why?

4) Which bullish vertical has the most inherent adjustment capabilities?

5) Now, consider the case of a bearish vertical that is placed ABOVE THE

This, I’m certain, is trivial for you, but my lack of knowledge is
costing me money.
Many thanks for your thoughts on this. 



Hello Carl,

The fact that this is costing money makes this question a priority for me.  I've incorporated enough materiel here to try to answer in detail.  I truly hope this helps you. By the way, this will be trivial to you also – after you understand it.  Don't be concerned about asking.  This is a very good and practical series of questions.

This is not complicated – but it can be confusing.  The confusion is through no fault of your own and I anticipate that I can eliminate your problem.  If there are further questions, or if something is not clear, please submit another comment.

1) Confusion indeed.  That's because most of the options world makes this far more complicated than necessary. There is no need to use all those adjectives to describe a simple position. If you think about these spreads as I suggest below, the confusion disappears.

Spread terminology

a) There are ONLY two types of simple vertical spreads:  Call spreads and  Put spreads

b) There are only two actions: Buy and sell

c) By definition

When you BUY a spread, you buy the option with the higher market price. 

When you sell a spread, you sell the option with the higher market price. 

[To clarify, if necessary: The 'price' above refers to the option premium, not to the strike price]

d) When you BUY a CALL spread it is Bullish (Thus, there is never a reason to refer to a bull call spread)

e) When you SELL a CALL spread, it is BEARISH (Thus, there's no reason to refer to a bear call spread)

f) When you BUY a PUT spread, it is BEARISH

g) When you SELL a PUT spread it is BULLISH

NOTE: Each of these examples is the same as buying or selling a call or put.  If buying a call is bullish, then buying a call spread is bullish.  Pretty simple, isn't it? 

Why anyone has to add an adjective such as bull or bear to a spread is beyond me.  And then they go further, by telling traders that you can buy or sell a bull put spread.  Then they teach that you can buy or sell a bear put spread.  Far, far too absurd for discussion. Too many words just add to the confusion.

h) If you choose to trade a put spread, then buying is bearish; selling is bullish.  That's exactly the same as when you buy or sell a put.

i) If you choose to trade a call spread, then
buying is bullish; selling is bearish.  That's exactly the same as when
you buy or sell a call.It just doesn't get an simpler than that.

Examples below


1) Remember this:  Carl – the fact that you already
understand that you can place a bullish trade with either calls or puts
is significant.  Many traders go for years without ever grasping that
simple concept.

To take it one step further, when the strike prices and expiry are the same, buying the call spread and selling the put spread are equivalent.  [In your, hopefully former, terminology, when you buy a bull call spread or use a bull put spread, you are making equivalent trades] That means that the expected profit and loss is essentially identical.

That also means it makes no difference which you trade.  This is important.  It makes no difference to the profit and loss. You can trade whichever is more convenient (more on this below).  There is no need to play out several scenarios.

Example: RGTO trades at 63

a) You can buy a call spread (buying the more expensive 55s)
Buy  RGTO Aug 55 calls
Sell  RGTO Aug 60 calls

You pay a debit of $X

b) You can sell the put spread (selling the more expensive 60s)

Buy  RGTO Aug 55 puts
Sell  RGTO Aug 60 puts

You collect a cash credit of $Y

When the markets are efficient, as they almost always are, X + Y = $5 (the difference between the strike prices x 100)

In other words, if you can buy the call spread by paying $3.80, you will be able to collect $1.20 for the put spread.  Either trade offers the same risk and reward.  Maximum gain: $1.20.  Max loss $3.80

If you grasp this truth, you are home.  If not, I discuss this concept of equivalent positions in greater detail in The Rookie's Guide to Options or in this blog post.

2) I prefer to trade options that are out of the money.  I recommend you do the same.  And there are two practical reasons (after all, the goal here is to save money -right?)

a) In general it is easier to trade less expensive options.  In the money (ITM) options  carry a much higher price tag (premium) than out of the money (OTM) options.  Why easier?  Because the market makers usually make tighter markets for OTM options.  That makes those options easier to trade.

Speaking of saving money, you do enter your orders as spreads don't you?  Here are two absolute rules that you must (for your benefit) obey:

i) Never enter a market order when trading options.  Use limit orders

ii) Always trade these call and/or put spreads using a spread (or combo) order.  DO NOT trade these spreads as two individual trades.  If you don't know how to trade spread orders, get on the phone with your broker's customer service people and get them to show you how to trade spread orders.  Be certain you understand the difference between buy and sell.  This is not an insult to you: some software can get confusing or your broker may use a strange terminology.

Thus, BELOW THE CURRENT STOCK PRICE, I SUGGEST SELLING THE PUT SPREAD because the calls are in the money and the puts are out of the money, and my advice is to trade OTM options.

Thus, the better bullish position, using options that are below the stock price, I would sell the 55/60 put spread.

3) Question 3 distresses me.  Which is more likely to be assigned? 

I trust that you understand: the only options that are assigned are IN THE MONEY OPTIONS, not out of the money options.  If you do not grasp this concept, it is too soon for you to be trading options.  To have any chance to succeed, you simply must understand how options work.

If you understand this, then your question is answered: Avoid selling options that are ITM and you face zero risk of being assigned.  Obviously OTM options can become ITM options when the stock price changes.  In that case, you once again face the possibility of being assigned.  But this risk is truly not a problem.  In fact, it is usually a benefit. 

Bottom line: by trading OTM  options, the chances of being assigned an exercise notice are far less than when trading ITM options.

I want to clarify:  You asked which vertical is more likely to be assigned.  You are never assigned on a 'whole' spread.  You can only be assigned on a single option – and it does not matter whether it is part of a spread.  Thus, I assume you mean: in which situation are you more likely to be assigned.  The answer is any time you are short ITM options you stand a chance of being assigned.

Thus, if trading the 55/60 call spread (stock is 63) it is possible to get assigned on the call with the 60 strike price.  However, the chances of getting assigned before expiration are very small.  And if it did happen it would be a gift to you.  Take my word for it, it would be a good thing (assuming there is no dividend involved).

Why does being assigned frighten you?  Can you let me know?  It is nothing to fear.  Of course if your reason is that it generates extra commissions and fees, then I understand.  That is something to avoid.


4) "Inherent adjustment capabilities."  As mentioned above – and perhaps you did not know this previously – the positions are  equivalent.  You can easily adjust either position in exactly the same way.  Neither has any advantage

I still prefer trading the less expensive, out of the money options, and suggest you do the same. 

5)  If you want to place a bearish trade
using options that are above the current stock price, then you can buy
the 65/70 put spread or sell the 65/70 call spread.  Reminder:  These
are equivalent positions.

I strongly suggest that you trade the
calls because they are OTM options.  Using ITM put spreads is a very
(and I mean very) bad idea.  Whereas it is unlikely that you would be
assigned an exercise notice ITM calls prior to expiration, that is
not true for puts. 

If a put is sufficiently ITM, and if
the put owner feels there is little chance that the put will move
OTM prior to expiration, it makes sense to exercise that put.  Let's
omit the rationale (for now) due to space considerations.

What you need to know is that selling ITM [AMENDED] puts is a poor choice.  Don't do it and I'll wager that your results
will improve right off the bat.  Those pesky assignments on put options
will cease. [To re-iterate, being assigned on calls is often beneficial]

Carl, I hope all of this is clear.  Please let me know if it is not.  And if you need more help – tell me why this is costing you money.



"I want to thank you so very much for writing your wonderful introduction to
options. It's by far the best source of *useful* information that I have read. It explicitly addresses so many
questions that other, more technical works take for granted."  KS

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