Sometimes Deeper In-The-Money Is Better

With the market moving higher, we have consistently modeled out several bull call spreads in group coaching class in recent months. Here is something to think about next time you are bullish as an option trader and are considering a bull call spread. Many times, moving the spread in-the-money (ITM) makes sense from a probability and positive theta perspective. Let’s consider a recent example.

Bull Call Spread in DIS

In Walt Disney Co. (DIS) recently, we modeled out a bull call spread with 10 days to go until expiration. We modeled out a 99/102 bull call with the stock trading at $98.92 at the time for a cost of 1.30 (3.30 – 2) as seen below. Max profit is the difference in the strikes minus the cost, and in this case that would be 1.70 (3 – 1.30). The positive delta at the time was 0.14 (0.52 – 0.38), and the position had a slight negative theta of 0.01 (0.16 – 0.17).  There was absolutely nothing wrong with this spread, but could we improve the odds without giving up much more risk?

Deeper ITM

What if we moved the spread deeper in-the-money (ITM)? What does moving deeper ITM do? If we went $2 deeper ITM, the new cost would be 1.58 (4.35 – 2.77) as seen below. The max profit is now 1.42 (3 – 1.58). The positive delta is 0.15 (0.62 – 0.47) and the theta is positive 0.01 (0.17 – 0.16).


As always in option trading, there are risk/reward trade-offs, and this trade is no exception. The risk goes up, which means the reward goes down, but lower strikes allow the spread to produce a positive theta on the trade sooner if the stock responds and increases in price. In addition, the probability of the trade is better with max loss further away and breakeven and max profit even closer. Remember that theta is highest at-the-money (ATM), so when the stock price reaches past the breakeven point of the trade, the position has positive theta. In this instance the breakeven is $98.58 (97 + 1.58), and the stock is on the right side of breakeven already.

Something to Consider

It may not always be prudent to move vertical debit spreads deeper ITM, but it is worth a look, especially with expirations shorter than two weeks. The risk goes up and the max profit goes down, but that tradeoff might be worth it for the probability of having a profitable trade. You have to decide that part!

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

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