# Derivatives - bull and bear spreads

Hi guys - How do you know when to use a bull call spread versus a bull put spread. Both give limited upside with limited downside and reduce the cost? Same for a bear call spread versus a bear put spread.

Thanks

As far as exam wise, whenever the vignette tells you to

In real life I would imagine depending on prices…but no expert here.

Assuming that they’re priced fairly, it makes no difference which you use. You’ll get the same profit either way, assuming you calculate the profit correctly.

(Note: the CFA curriculum _ doesn’t _ calculate the profit correctly.)

Thanks - I got confused on a question on the topic tests but looking at it again now there is only one solution it could be.

Would you kindly elaborate?

I understand it is:

Max profit = (X2 - X1) - (p2 - p1) (or c2 - c1)

Max loss = p1 - p2 (or c1 - c2)

For fairly priced options, p1p2c1c2 because Xlow − PV(Xlow) ≠ Xhigh − PV(Xhigh).

To compute the profit correctly you need to deduct the _ future _ value of the (net) option premium from the option payoff, not the present value.

However, for the exam, you need to do the computations as the curriculum tells you to.

huh, I’m not getting this, I mean you already committed to a strategy starting today and at the end of the maturity, to calculate profits you used costs that you incurred (which is what we paid for at the start, i.e. using present values).

Don’t worry about it for now.

Come back next Tuesday and ask me about it . . . after the exam.

Just to clarify for me:

Max profit and max loss is the same for both:

profit = X high - X low -net option cost

loss = net option cost

But BE is different:

for bull call spread: X low + net option cost

for bull put spread: X high minus net option cost

Is this correct?

Hi Self Employed

I’m not in condition to think clearly and draw payoffs so I will have to memorize this.

So you are telling that for the two bull structures and for the 2 bear structures the BE calculation is exactly the same?

OK there’s something I very much not understand here. If I draw the payoff curves this is what I get.

For a BULL CALL:

I gain most when both options called:

payoff = - St + XH + St - XL +/- options cost

therefore the max profit = XH - XL +/- option cost

For a BULL PUT:

in case both options are called:

payoff = - XH + St + XL - St +/- options cost

therefore = XL - XH +/- options cost which will be negative and this will be the max loss in my view

While max. profit is the net option cost in case both options expire worthless

So I don’t seem to get how the max profit max loss and be of the two structures can be the same!!!