ways to do spreads (bull and bear)

CFA Level III
#1

Okay the instinctive way to do a bull spread is to buy a low call and sell a high call

the instinctive way to do a bear spread is to buy a high put and sell a low put

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CFAI also mentions that you can do a bear spread by buying a high call and selling a low call, makes sense

however what i cant find a mention of is doing a bull spread using puts, but it seems possible using the same logic, sell a high put and but a low put, can someone confirm that basicly the bull and bear spreads can both be done with calls or puts? also if someone can point me to where it is mentioned that a bull can be done with calls…many thanks guys

#2

if you are a net seller of premium in any put spread, you are effectively bullish.

if you are a buyer and seller of options at different strikes, you are effectively making a spread bet.

regardless of whatever CFAI wants to call it.

#3

There are two bear spreads. Bear call and Bear put. Just think logically, if you are bearish, you think the stock is going down. So how would you structure a Bear Call Spread? You would do the opposite of bull call, sell low strike, buy high strike. You receive a greater premium on the low strike than the premium you pay on the high, but the high strike protects you if the stock sky-rockets.

For bear put spread, you would buy put high, sell put low. The lower put subsidizes the cost of your higher put, but limits the gain if the stock goes to zero.

#4

Yes, with some nuance:

Bull Call Spread: max loss = premium paid; Bull Put Spread: max profit = premium collected.

#5

should a bear spread with puts and a bear spread with calls not always equal the same?

hypothetical example: So= 100, stock price falls to 88

following options are available

strike call put

90 15 3

100 5 7

whats the value at expiration?

#6

Are you asking for value or Profit? Thats an important distinction…

Bear Call Spread

Buy the 100 strike, sell the 90 strike, net premiuim is $10. If stock value is 88 at expiration, the position VALUE is 0, as the options are both out of the money. The PROFIT is $10.

Bear Put Spread

Buy the high strike of 100, sell the low strike at 90, for a net outlofw of $4 (or -$4). If stock is at 88 at expiration, the VALUE of the position is (100-88) -(90-88) =10. The profit is 10+net premium, or 10 + -4 = 6.

#7

ok thanks. i was just confused because in the sample Number 2, they asked to calculate a bear spread with options and they used puts. i had used calls and it turned out to be wrong…

#8

don’t the bear spread or the bull spread require 3 options?

#9

CFA Paid Sample #2 Spoiler below ----

I noticed a question where they asked you to figue out payoff on a “bear spread” but didn’t specify if it was a put or call spread, but the answer used put… kinda pissed me off. They gave both call and put option premiums for the relevant strike prices in a table an just assumed we would know what they meant.

#10

I think a safe assumption to make is: Bear Spread = Put Bear Spread, unless specified its a bear call spread.

Bull Spread - Bull Call spread unless specified its a bull bear spread.

CPK - you are referring to a butterfly spread, where you buy a low strike otpion and a high strike option, and sell two options in the middle

#11

sorry, i have one more questions. with the bull / bear strategies, I do not actually own the stock.

so lets look at the scenario, where a stock was 100 and dropped to 88.

a) i have a long put that gives me the right to sell the stock at 100 (so the value is 12)

b) at the same time i have a short put forcing me to accept a payment of 90 but stock is only worth 88 (-2)

so i get that the net effect is 10

but thinkig this out loud, how would i sell something for 100 but i do not have the stock?

#12

Well, two possibilities:

In this case, two ways to think about it:

  1. If the stock is at 88, the lower put that you sold is an obligation to buy the stock. So you have to buy it at 90. Now you have the shares to sell at 100.

  2. You dont actually need to own the stock. Yuo can always sell the cotnracts before they expire. At expiration, the value of the contract if in the money will be all intrinsic value, or worth 12 for the high put, and -2 for the low put, netting 10.

#13

Or your original contracts could be cash settle. If you trade options OTC you can set the contract up pretty much however you want. I always set my options as “beer” settle.