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Why a Bearish Call Spread Can Widen Over Time

Article Quant Q&A · Author: Sumit
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Summary

The document explains why the premium difference between two calls in a spread can change after the position is opened. Its example describes an at-the-money short call paired with an out-of-the-money long call on gold, and clarifies that this leg arrangement is a bearish call spread rather than a bullish one.

The spread’s value can respond to changes in the underlying price, the passage of time and option decay, and shifts in implied volatility. The answer attributes the observed widening to a combination of these effects, without quantifying each contribution or identifying how much came from any one factor. It offers a conceptual explanation rather than a calculation or forecast. The example’s outcome depends on the particular market path, remaining time to expiry, and volatility changes, so the spread need not widen in every similar position.

Key ideas

  • An at-the-money short call combined with an out-of-the-money long call forms a bearish call spread.
  • The premium difference between spread legs can change after the trade is opened.
  • Underlying price moves, time decay, and implied volatility changes can all affect option premiums.
  • The example does not isolate the contribution of each factor.

Tags

OptionsCommoditiesVolatilityDerivatives pricing
Full text
# Can the spread between option premium for bull call spread change over time?


# Can the spread between option premium for bull call spread change over time?












I have created a bull call spread. There was spread of 70 dollars between the option premium of 2 strikes I selected. Now the spread between option premium of 2 strikes is greater than 100 dollars. What can be the reason for this? I have atm short call and otm long call on gold. Now the price has increased. I created this strategy on 7th July 2020 and expiry is after 1 year.

## Answer by Bob Baerker (score 3)

https://quant.stackexchange.com/a/57496

An ATM short call combined with an OTM long call is a bearish call spread not a bullish call spread.

Option prices vary as the price of the underlying changes, as time passes and option premium decays as well as due to changes in implied volatility. A combination of the three of these is responsible for the spread widening.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.