Debit spread or credit Spread?

[lemondew]

The question is which is more suitable.

Suppose our stock is quoting at 1000. We are expecting it to go down. Which would be a better option.

a) Buying debt spread buy 950 PE /sell 925 PE
b) Selling credit spread sell 1050 Ce buy 1075 CE

Debit spreads lower risk high rewards if it works in our favour. Credit spread has lower reward higher risk in adverse cases.

We will consider cases when we are trading at 1) first 15 days of expiry and
2) last 15 days of expiry.

Let us now not consider cases where IVs will drop or rise. We ll assume Ivs remain same as one position will nullify other.

Some more points to consider
Which will make money faster? Which will work better in long run?

 

[pannet1]

Don't know if this is the answer you are looking for ..

from "path to consistency" thread

No problem, quite some time has passed.
So strategy was supposed to be a benefit for the members.

At 1:05 PM, since any European Mkt opening did not make any up move, my expectation was that sell-off will occur in closing 1 Hr. Geopolitical tension and weekend uncertainty.

Position taken was: Put (Bear) Debit Spread
Buy BN21600 PE 5 lots Price:134.77 and IV:12.24%
Sell BN21500 PE 5 lots Price:91.49 and IV:12.34%
BN Spot: at the time 21565
So question is why Put Debit Spread?

1. Expectation is bearish move
2. Why Put Debit and not Call Credit
AnswerWhen mkt falls, Puts demand increases and ppl start dumping the calls.
That is why puts will gain IV and we need to take Debit Spread.
If I took CE credit spread, IV would decrease bcos of low demand and loose some value bcos of Vega.

At my peak, (when position exited)
IV was 15.45%(21500PE) and 15.65%(21600PE)

 

[travi]

Thanks Pannet1 for quoting the post.

My wording wasn't very clear in the last few lines of that post,
but when as Puts demand will increase IV will shoot up which is good for Debit Spread and calls will loose IV which is good for credit spread.
What I meant was, the rate of rise in IV of puts is more than IV drop in Calls,
hence, Debit put spread has a slightly higher gain

 

[travi]

Coming back to the original question,
IV definitely matters but lets assume this as constant, so Vega is taken care of.

In this case, next is Delta.
It is pretty clear that both are bearish spreads, therefore,
a drop in price will make a profit to both and loss in upmove.

Last is Theta,
If both Spreads Expiry OTM
Debit spread would loose the spread amount, 25pt
on the other hand
Credit spread would gain 25pts

If they expired deep ITM, than both would have only Intrinsic value
then debit spread would have max profit of 25pt
while credit spread would jave max loss of 25pt

Days to expiry
As days get consumed, Debit spread looses a small value to theta
the Credit spread would gain slightly.

So, if I expect a very short term explosive down move, choose Debit Spread

else Credit spread when ur sure it'll go down but not when.
Even if it expired OTM, u'd gain something.

The question is which is more suitable.

Suppose our stock is quoting at 1000. We are expecting it to go down. Which would be a better option.

a) Buying debt spread buy 950 PE /sell 925 PE
b) Selling credit spread sell 1050 Ce buy 1075 CE

Debit spreads lower risk high rewards if it works in our favour. Credit spread has lower reward higher risk in adverse cases.

We will consider cases when we are trading at 1) first 15 days of expiry and
2) last 15 days of expiry.

Let us now not consider cases where IVs will drop or rise. We ll assume Ivs remain same as one position will nullify other.

Some more points to consider
Which will make money faster? Which will work better in long run?

 

[pannet1]

i did not see ravi's reply, searched and found this