Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 38

Bull vs. Bull

“Now notices something about the bull call and the bullput,” said Nate. “Both are basically bullish trades, of course; it’s just that one, the bull call, is a debit trade and the other, the bull put, is a credit trade. Everything else about them follows from this central fact: the difference between a debit and a credit trade.”

“If you think about it, for example,” said Aaron, “you’ll know that because the bull call is a debit trade, the primary instrument has to be the one we buy: it’ll be the long instrument. And, of course, in the case of a bull call, that means it will be the long call.”

“Right,” said Shorty. “We’re using the long call as the primary instrument to make money. As a result, we place it only slightly out of the money so that it will go in the money and generate a profit. And, of course, that’s why it’s expensive: strike prices that are slightly out of the money are always more expensive than those that are further out.”

“And that’s why this is a debit trade,” summarized Nate. “We are buying this expensive option rather than selling it. Of course, we do sell an option—in this case, we place a short call. But because the short call is used primarily to limit risk, we place it further out of the money, and therefore it is less expensive. And that’s why we start out in the hole in this trade—what we’re buying is more expensive than what we’re selling. That’s what it means for this to be a debit trade.”

So if we remember that the bull call ...