There are quite a few synthetic scenarios when it comes to option trading. By far, my favorite is that vertical debits are equal to verticals credits. Say what? What I mean is that a bull call is the same as a bull put and a bear put is the same as a bear call. Obviously, you are substituting calls for puts and vice versa. This is a lesson I teach to all my one-on-one coaching students because it is a very important one. Here we will focus on the bull call and bull put synthetic relationship.
Bull Is in the Name
As the names would imply for both bull calls and bull puts, there is a bullish bias to these option trades. Generally, option traders use bull calls for a directional move and bull puts for an expected non-move lower (non-bearish as I like to say). But what if you substituted puts for calls when modeling out a bull call spread? The risk/reward would essentially be the same (bid/ask spreads may skew this a tad), as would the max profit, max loss and breakevens.
Synthetic Greeks
What surprises a few option traders is the option greeks are the same too. Many option traders will focus on the bull put (credit spread) because of the positive theta that is associated with selling an out-of-the-money (OTM) credit spread. But if calls were substituted for puts, the positive theta would essentially be the same as would the other option greeks.
Check Out an Example
In the example below, the underlying was trading essentially in between the long and short strikes.
Option gamma and vega are close to neutral for both and the delta is essentially positive 28 for both. Theta is essentially positive 11 for both too. A vertical debit spread can have positive theta? Yes, it can! Max risk for the bull call on the left is the cost of 1.74 (2.85 – 1.11), which means the max profit is 1.26 (3 (diff in strikes) -1.74 (cost)). The breakeven for the trade is $595.74 (594 + 1.74 (cost)). The bull put on the left has almost the exact same max profit, max risk and breakeven. Max profit is 1.27 (2.25 – 0.98), which means the max risk is 1.73 (3 (diff in strikes) – 1.27 (credit)) and the breakeven is $595.73 (597 – 1.27 (credit)).
Final Thoughts
There are reasons you might choose one over the other even though they are synthetically the same. Selling deeper in-the-money (ITM) options gives you a much better chance of being assigned and you generally will have wider bid/ask spreads too. Why give the market maker an advantage, right? Prove it to yourself: Model out a bull call spread and then change the calls to puts. You will see exactly what we just talked about. Just knowing about synthetics can make you a better and wiser option trader.
John Kmiecik
Senior Options Instructor
Market Taker Mentoring
