By itself, a Bull Call Debit spread would work better on a bullish stock over a Bear Call Credit spread. But, in the context of an RPM the Bear Call Credit spread behaves much differently and better than a Bull Call Debit Spread.
Let’s take a look at a basic RPM that I am tracking from the Plain Vanilla Portfolio:
Buy to Open 200 shares PNRA @ $50.47
Buy to Open AUG 60 put @ $13.40
Total Cost = $63.87
Guaranteed by put = $60.00
Total At Risk = $3.87, or 6.1%
Using the PowerOptions Portfolio tools, I can link to the Position Analysis Page and see the potential Roll Out Opportunities for this RPM:
Roll to IM #6: (Bear Call Spread)
Sell APR 55 call for 1.80
Buy APR 60 call for 0.45
Total Net credit = 1.35
What is important here is how the credit spread behaves in the context of the RPM. As Kurt would say, “Did you catch this? We were paid to own a 60 strike call. The APR 55 call is covered by the stock, and we own a 60 call for free, or a credit. If the stock moves up, any profit we make on the long call is gravy.”
Notice how we have not limited our upside potential, and we receive a credit on the trade to limit our initial risk. The first rules of the income methods are to lower the risk first (collect a premium) then earn extra profits.
Now, if I reverse the trade and enter a Bull Call Spread:
Buy to Open APR 55 call for 1.95
Sell to Open APR 60 call for 0.30
Total Net Debit = -1.65
New At Risk = $5.52 ($3.87 + $1.65), or 8.4%
The Bull Call Debit spread also does not limit the potential upside return, but we have ADDED risk to the initial RPM which goes against the basic concept of the income methods to begin with. This is why Kurt can use the Bear Call spread on the RPM and still profit if the stock moves up, OR effectively lower the initial maximum risk if the stock falls. The Bull Call Debit spread does not satisfy the goals of the Income Methods.
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.