Quiz Question on Credit Spreads in SPX!

Will you get a  bigger credit for an OTM call or put credit spread in SPX?

I asked this question today in a teaching session at Sheridan Mentoring.

Most thought the answer was puts because OTM puts are always higher implied volatility than OTM calls, which is true. But,  the answer was that you get bigger credits for OTM call spreads than put spreads in SPX.

Let’s look at an example. SPX is currently around $2121. On the call side, I sell the 2185-2175 June credit spread for $1.62 credit. The delta of the short call is 15. On the put side, the 2010-2020 put credit spread is around $1.10.

Credit

The delta of the short put is 15 also. Why did the call credit spread get more credit when the short delta of the call and put spread were both the same at 15? Couple things going on here.

First, the implied volatility of the put your buying on the put credit spread is always higher than the implied volatility of the  put you are selling.

Call Credit Spread

Versus the call credit spread, the call you are buying is usually lower implied volatility level than the call you are selling, that makes a difference.

Second, notice that though we are selling the same delta for the short call and put, the short put is 100 points out of the money while the call is only about 54 points out of the money. Most stocks don’t have the same volatility structure in out of the money options as do SPX and RUT.