# Options - Long Calls vs. Bullish Credit Spreads



## CascadeX (13 December 2009)

Hi all,

I just wanted to get a second opinion on this.

In terms of the payout that one would receive, is there any difference between 

(i) long call option 
vs. 
(ii) bullish credit spreads (i.e. bull call/put credit spreads)??

My feeling is that the delta around the strike is higher for the credit spreads, and that the penalties for being slightly wrong with an underlying price hovering around strike is less for the bull call/put spreads, as an underlying that hangs around slightly above the strike is more profitable than with a long call option.
Also sometimes the premium paid for a long call can be so high that it is much better to do the bull call/put strategy. 
But couldn't we compensate the shortfall in the long call's profitability by establishing a long call that is deeper in the money so that the strike price is a bit lower and hence more profitable if the underlying price ends up comfortably above the strike??

I don't know why, but the profitability and return on capital of a bull-put or bull-call spread is usually always higher than a plain vanilla long call option IF the premium paid for the long call is either similar in value to potential loss of the bull-put/call or high in general. 

I can definitely see a difference between a long call vs. credit spread where there is heaps of volatility and the price of the underlying goes up way above the strike (i.e. long call = unlimited profit), however for a low volatility situation where the underlying closes just slightly above the strike, usually always ... the bull put or bull call credit spread has a higher return on capital. 

Thanks.


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## NeuromanceR (14 December 2009)

CascadeX said:


> *bull call credit spread* has a higher return on capital.




How would you construct this position?


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## CascadeX (14 December 2009)

NeuromanceR said:


> How would you construct this position?




sorry i meant debit spread for the call position.


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## wayneL (14 December 2009)

CascadeX said:


> Hi all,
> 
> I just wanted to get a second opinion on this.
> 
> ...



Both strategies have their place and neither is superior to the other all the time.

The trick is to figure out what you want to achieve, and what risks you are willing to take to achieve it, bearing in mind the current volatility.

If IV is rock bottom and you think the underlying is going to blow through 5 strikes, you'd be nuts to enter a vertical spread.

On the other hand, if IV is sky high and you think the underlying is only going to grind upwards, you'd be nuts to buy the call only.

Analogy - You don't use a driver on the putting green and you don't use a 7 iron to tee off on a par 5. Each club has its own purpose.

Likewise, each strategy has its purpose.


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## CascadeX (14 December 2009)

Thanks for your reply Wayne.

I do notice that more often than not, with plain vanilla call options, I have in the past, lost money where volatility was low and the underlying was languishing around strike. 

Having said that, yes ... if there were a situation where the underlying was going to go through 5 or so strikes, I would take the plain vanilla call. 
However often the market fully prices in this volatility, and the premium costs a fortune. 

The most favorable situation is where the premium is not highly priced, and the market is not anticipating high volatility AND the underlying is going to go crazy over and above strike. This is rare but, and you would also need to do your research too on the underlying. 

Thanks again.


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