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Calls vs Puts with Calendar Option Spreads – Does it Matter? Ep 40

Welcome to another episode on Hungry for Returns, where I answer your trading and investing questions on the stock market or investing.

If you have a specific question, you can submit a voice question here!

Let’s go to the question for today. It’s all about calls vs. puts and why a lot of times, it doesn’t matter.

Here’s a question from Greg:

“Hello, Sasha! My name is Greg. I have a question on how in calendars you refer to doing puts or calls the same.

Does that mean they end up with the same result?

For example, for Amazon, if I was to do a $1,900 calendar if I put it in as a call or a put, would I still have the same results say two weeks later?

Thanks for taking my question. I appreciate everything you do!”

Here’s what I want to share with you.

The pretty much, yeah. It is going to be the same.

Calls & Puts – In Details

I want to give you a background. Calls and puts it’s not going to matter too much when you’re doing spreads. That’s the short answer.

There is an issue when you get close to expiration week. That’s because things are in the money. And when you’re in the money, remember those contracts have obligations even if you’re doing a spread. Anytime you’re short one; you’re going to be obligated.

Overall profit and loss – not a big difference. Overall getting in and out and that could be a more significant issue and problem. But overall, it’s not a big thing if you’re trading liquid stocks.

Let me give you a breakdown here. I’m going to hide the current position. We do like to let’s say an 1850 call here. We do the same thing on the put side. Analyze trade, and we will do the puts.

You can see one is slightly different than the other.

You’re getting calls, and you’re doing for about $28. Your max profit at these points around $3143, risking about $2800.

Let’s take a look at the put side. You’re doing about $3150, risking about $2440. On the calls, the risk is $300-$400 more. The profit on the put side potential is around the max profit of around $3000 and on the call side around $3100. You can see they’re very similar.

Now, why is there a big difference? Well, the big difference is when you’re doing, let’s say 1850.

The big difference is that the put side is in the money. That’s a big difference. Overall you can see profit and loss is not that big of an issue. It’s minor, but keep in mind the theta and all the other things go with it.

It’s not like one is better than the other, just on the profitability side. If you look at this one right here on the call side, we have a theta of 5.8, and of course, these are wiggling. And this one’s 5.47. So even though it may cost less, one has maybe 20 or 30 cents more theta here and there. And 0overall it’s not going to matter that much. 

Here’s where it does matter.

This one at 1850 is in the money if you’re on the put side. And getting into things that are already in the money is a little tougher. That’s because they’re traded a little bit less. That’s one thing. The other thing is that because it’s in the money, it has obligations. Let’s say you put this trade 40 days out. If they’re buying these contracts to hold for 40 days, they’re not going to execute their right most of the time.

I’m not saying it won’t happen. But 99% of the time, it’s not going to pan out to where you’ll get an assignment. But the issue happens is if you wait until let’s say five days before expiration, you’re going to have a much bigger problem with the ones that are in the money.

Whereas the ones out of the money will have less of a problem. So which one would I do? Which one would I go with?

I typically like to stay out of the money. That way, I don’t have contract problems. But in certain situations, it may be fine. If you can’t get filled and if you need to hedge, it may be fine to go in the money as well.

When Would You Go in the Money?

In certain rare situations where you can’t get filled, there’s just more trade there, or maybe the stock is going to move in that way and blow past it. In that case, you could go the other way. The other times when I do go in the money is sometimes when I have a ton of positions. Let’s take the call side. I have a ton of positions on the call side, where it’s just so confusing.

And I want to put a few more different positions. Let’s say I’m doing 25 different calendars on here, and they’re all spread out amongst these. To manage it properly in the same account, if you want to do a butterfly or vertical to hedge, you might go in the money on the put side. That one is the puts even though I did it in the money to vary it up because to see all those contracts, it can get confusing. And that’s when you’re trading a lot larger.

That’s some situations when you may want to go in the money. Otherwise, profitability wise it’s not much different. You can see this one – you make $3141. And the other one you can make about $3109.

Capital usage is $2800, and this one is $2440. There’s a small difference.

Final Word

The big issue and difference is getting in and out of the position. That’s because if you’re in the money, it’s a little harder getting in and out. 

And, of course, contract obligations. If you’re getting close to expirations, anything in the money you’re going to have a little bit of a problem with.

Usually, it’s better to stay out of the money. But profitability wise, it doesn’t matter that much.

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