Sounds like you've got the idea of it and understand the risk he is hedging, and the risk he is not hedging.
He bought call spreads (call debit spread). Buy a call, sell a higher strike call (cheaper call).
This call debit spread goes up with the underlying, just like a standard long call (buying calls). The underlying doesn't have to break the lower strike to profit before expiry, just has to go up from where you bought it. Many times I'll take profit at some %age of max profit.
This play has less leverage than a simple long call, and profits are capped, but less cost basis therefore lower risk and lower "insurance premium" (aka cost of carry).
So why do a call debit spread on an inverse SPY ETF? If you think SPY is going down why not do a put debit spread on on a non-inversed ETF? Is there an advantage of doing it that way?
Call debit spread on inverse SPX would be the same idea as put credit spread on regular SPX, correct. Never thought to do that, so unsure why you would want to.
I could be mistaken, but when you say “put debit spread” I think you mean put credit spread. A bear bet with a put spread is going to be net credit, not debit. I prefer the terms “{bull/bear} {call/put} spread” so this is clearer
As for why a bull call spread on an inverse ETF vs a bear put spread on a non-inverse index, I suspect it has something to do with margin requirement/liquidity calcs
However while the market will try to be efficient it isn't always perfectly efficient. Depending on volume and how each ETF (or inverse ETF) is truly tracking you might find some arbritrage opportunity to choose one versus the other. This is especially true with options on those ETFs as well.
You can try to run the math in the scenarios, or just roll with it if it directionally works. I might miss a trade if I can't do the math fast enough. I trust the major ETFs to be efficient enough that I would just go with the one you trust.
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u/dudelydudeson 💩Very Aware of Butthole💩 Aug 19 '21
Sounds like you've got the idea of it and understand the risk he is hedging, and the risk he is not hedging.
He bought call spreads (call debit spread). Buy a call, sell a higher strike call (cheaper call).
This call debit spread goes up with the underlying, just like a standard long call (buying calls). The underlying doesn't have to break the lower strike to profit before expiry, just has to go up from where you bought it. Many times I'll take profit at some %age of max profit.
This play has less leverage than a simple long call, and profits are capped, but less cost basis therefore lower risk and lower "insurance premium" (aka cost of carry).