For our chosen bullish put credit spread strategy, the delta is 0.1105. To achieve a similar exposure to holding 100 shares of the stock, we can calculate the number of contracts needed by dividing 1 by the delta, which gives us 9.04. Rounding down, we arrive at 9 contracts. By trading 9 contracts of this spread, we create an options position with a delta roughly equivalent to that of the stock, ensuring the position will rise (or fall) approximately dollar for dollar with the underlying stock.
Comparison table with real numbers:
Please note: The figures in the comparison table are illustrative and don't account for potential commissions, taxes, or other applicable costs.
|Characteristic||Bullish Put Credit Spread||Buying the Stock|
Sell to Open SMH Put 15-sep-2023 strike 140
Buy to Open SMH Put 15-sep-2023 strike 135
Buy to Open SMH 100 @ $145
$2,900.49 (Margin requirement)
$2,500 (Based on Take Profit of $170)
|Maximum Profit %|
$1,500 (Based on Stop Loss of $130)
Limited to $3,195
Limited to $1,500 based on the stop-loss
|Profit Potential (% of Initial)|
45% (of the margin requirement)
17.2% (based on the take profit)
|Dividends and Voting Rights|
Entitled to dividends and voting rights
Swing trading with options, such as the bullish put credit spread, provides traders with the flexibility to utilize capital more efficiently, often requiring less initial investment compared to direct stock trading. This efficiency doesn't necessarily mean sacrificing potential returns, as the right options strategy can provide significant profit opportunities relative to the capital employed.
While the bullish put credit spread has a defined maximum loss, it is crucial to note that this loss can be managed, similar to setting a stop loss in stock trading. On the other hand, directly trading the underlying stock typically demands a more substantial initial capital outlay. And while we've incorporated a stop loss to manage risk in our stock trading example, without this protective measure, potential losses can be much larger, especially in the face of unexpected market events.
Both approaches have their merits and potential drawbacks. The choice between them should be based on individual trading goals, risk tolerance, and the specific market outlook. It's always essential to be well-informed and to consider multiple strategies and risk-management techniques in the ever-evolving world of trading.