Comparing two bearish strategies: Put and vertical call spread

Update 4/25
Saw this excellent post from evil speculator on spread basics. The post provide some numbers to back up the argument I made for selling spreads. Great explanation of spread basics.

At the moment, I am experimenting with two bearish strategies: buying a Put and selling a Call spread.

In this post, I share some of my thoughts on the two strategies.

The call spread synthetically is equivalent to the put.

Advantage of PUT: Higher profit potential due to larger delta. For each point move in the underlying, the PUT moves hugely. Will make money if underlying moves down.

Advantage of Call spread: Gives me better opportunity to make money even if my direction is wrong. Time decay works in in favor. Have some slack for the underlying to move against me and still make money. Can make money if underlying stays at the current price or moves down.

Disadvantage of PUT: Time decay. If the stock doesn't move BIG and FAST, I'm exposed to Theta, time decay of the put option. The underlying must move quickly and huge in order for me to make money.

Disadvantage of Call spread: Profit potential less.

The lesson of this experiment (although not yet over, since trades are still open), is that buying puts is good only for very short trading (a day or two). For longer hold periods of days to weeks, positive theta trades will put the probabilities on your side to win more consistently.


The baseball analogy I would give for the Put versus the selling the call spread is this:
Buying the naked put is about hitting the big home runs, but I will strike out a lot. Chances of striking out will be much higher than hitting a home run.

Doing the call spread is about getting the base hits each time and trying to improve your high batting average. I can play this game for a long time if I can make consistent returns, albeit it be smaller returns each time, but the overall returns compounded is huge.

Trading is about managing your risk and ways to improve your odds. If I am able to make money even if the direction I pick is wrong, then I will become successful trading in the long run.

Happy trading.