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I could probably write 100 articles on this subject alone: what is a better trade, a credit spread or a debit spread. To compare the two, I think it is necessary to show examples of stocks or ETFs that I use.

One of the many drawbacks of a credit spread is that it will tie up so much capital. I understand the many points and certain benefits of them, such as not getting exercised on your position. I think credit spreads are fine to use if you have little capital to work with and are extremely conservative. There are just too many other option strategies out there that I feel are far better, along with providing higher return on investment.

If you are working with a larger amount of cash, the temptation to go 'heavy" on a trade with an Iron Condor is ever-present because of the lower ROI.

One aspect I would really like to point out is that time is not necessarily a good thing to have with an Iron Condor, but this aspect often gets lost on many traders.

Take in point someone I know. He was using a credit spread (the iron condor) on Priceline.com (NASDAQ:PCLN), and going out one month with the trade. It definitely was not a good stock to use an Iron Condor with to begin with, just like Apple (NASDAQ:AAPL) is not. He got it handed to him on that trade. This is a great example of what type of stocks to avoid with an Iron Condor. If someone tells you it is a good idea or you read an article suggesting this is a good trade, they do not understand this trade fully, or they certainly do not follow the stock and the markets thoroughly enough.

Still, I will show a comparison between an Intel (NASDAQ:INTC) trade using a Iron Condor and a "Long Put Butterfly" spread, which is placed as a net debit. Intel is currently trading at $26.92/share.

I will leave it up to the reader to decide what is the better choice.

Trade Example #1A: Intel

Iron Condor - credit spread

Sell 25 INTC April 2012 $26.00 put options
Buy 25 INTC April 2012 $25.00 put options
Sell 25 INTC April 2012 $28.00 call options
Buy 25 INTC April 2012 $29.00 call options

Requirements

Cost/Proceeds($1,175.00)
Option Requirement$2,500.00
Total Requirements$1,325.00
Estimated Commission$125.00

Current Price: $26.92

PriceProfit / LossROM %
18.75($1,325.00)-53.00%
22.11($1,325.00)-53.00%
25.00($1,325.00)-53.00%
25.53$0.000.00%
25.64$285.0011.40%
26.00$1,175.0047.00%
28.00$1,175.0047.00%
28.47$0.000.00%
29.00($1,325.00)-53.00%
29.18($1,325.00)-53.00%
36.25($1,325.00)-53.00%

Trade Example #1B: Intel

Long Put Butterfly Spread - debit spread

Buy 25 INTC April 2012 $25.00 put options
Sell 50 INTC April 2012 $27.00 put options
Buy 25 INTC April 2012 $29.00 put options

Requirements

Cost/Proceeds$1,800.00
Option Requirement$0.00
Total Requirements$1,800.00
Estimated Commission$125.00

Current Price: $26.92
PriceProfit / LossROI %
18.75($1,800.00)-100.00%
22.11($1,800.00)-100.00%
25.00($1,800.00)-100.00%
25.64($190.00)-10.56%
25.72$0.000.00%
27.00$3,200.00177.78%
28.28$0.000.00%
29.00($1,800.00)-100.00%
29.18($1,800.00)-100.00%
32.71($1,800.00)-100.00%
36.25($1,800.00)-100.00%

Trade Example #1C Intel

Neutral Calendar Spread - debit spread- weekly options on first leg.

Sell 25 March Week 2 INTC $27.00 call options
Buy 25 March (3rd Friday of the month) $27.00 call options

Requirements

Cost/Proceeds$300.00
Option Requirement$0.00
Total Requirements$300.00
Estimated Commission$62.50

Current Price: $26.92

PriceProfit / LossROI %
20.19($300.00)-100.00%
22.79($300.00)-100.00%
25.53($277.50)-92.50%
26.43$0.000.00%
27.00$515.00171.67%
27.60$0.000.00%
28.27($230.00)-76.67%
31.01($287.50)-95.83%
33.75($287.50)-95.83%

For comparison, I will use Apple as a trade candidate (which I would never do using a neutral strategy that requires little movement in the underlying stock at this time), just to see the difference between a credit spread:

Apple Trade #1a - Iron Condor - Credit Spread

Sell 10 AAPL April 2012 $540.00 put options
Buy 10 AAPL April 2012 $535.00 put options
Sell 10 AAPL April 2012 $550.00 call options
Buy 10 AAPL April 2012 $555.00 call options

Requirements

Cost/Proceeds($4,550.00)
Option Requirement$5,000.00
Total Requirements$450.00
Estimated Commission$50.00

Current Price: $545.18

PriceProfit / LossROM %
401.25($450.00)-9.00%
457.39($450.00)-9.00%
516.48($450.00)-9.00%
535.00($450.00)-9.00%
535.45$0.000.00%
540.00$4,550.0091.00%
550.00$4,550.0091.00%
554.55$0.000.00%
555.00($450.00)-9.00%
575.57($450.00)-9.00%
693.75($450.00)-9.00%

Apple Trade #2b - Long Put Butterfly Spread - Debit Spread

Buy 10 AAPL April 2012 $530.00 put options
Sell 20 AAPL April 2012 $545.00 put options
Buy 10 AAPL April 2012 $560.00 put options

Requirements

Cost/Proceeds$1,600.00
Option Requirement$0.00
Total Requirements$1,600.00
Estimated Commission$50.00

Current Price: $545.18

PriceProfit / LossROI %
397.50($1,600.00)-100.00%
455.56($1,600.00)-100.00%
516.67($1,600.00)-100.00%
530.00($1,600.00)-100.00%
531.60$0.000.00%
545.00$13,400.00837.50%
558.40$0.000.00%
560.00($1,600.00)-100.00%
577.78($1,600.00)-100.00%
638.89($1,600.00)-100.00%
700.00($1,600.00)-100.00%

Apple Trade #1c - Neutral Calendar Spread - Debit Spread- Monthly

Sell 10 AAPL April 2012 $545.00 call options
Buy 10 AAPL May 2012 $545.00 call options

Requirements

Cost/Proceeds$6,950.00
Option Requirement$0.00
Total Requirements$6,950.00
Estimated Commission$25.00

Current Price: $545.18

PriceProfit / LossROI %
408.75($6,948.00)-99.97%
461.09($6,588.00)-94.79%
515.21$0.000.00%
516.19$263.003.78%
545.00$11,289.00162.43%
571.28$1,836.0026.42%
579.08$0.000.00%
626.38($5,562.00)-80.03%
681.48($6,492.00)-93.41%

Apple Trade #1d - Neutral Calendar Spread- Debit Spread- Weekly

Sell 10 AAPL March Week 2 $545.00 call options
Buy 10 AAPL March (3rd Friday exp.) $545.00 call options

Requirements

Cost/Proceeds$3,600.00
Option Requirement$0.00
Total Requirements$3,600.00
Estimated Commission$25.00


Current Price: $545.18

PriceProfit / LossROI %
408.75($3,600.00)-100.00%
461.09($3,600.00)-100.00%
516.19($2,593.00)-72.03%
530.28$0.000.00%
545.00$5,471.00151.97%
560.74$0.000.00%
571.28($1,930.00)-53.61%
626.38($3,494.00)-97.06%
681.48($3,495.00)-97.08%

You can always adjust the contract amounts to suit your risk tolerance for each trade. Instead of ten contracts on each "leg," you can use a much lower amount.

I plan to write an extensive article on the neutral calendar spread in the coming weeks.

Source: Credit Spreads Vs. Debit Spreads: A Profit/Loss And Risk Comparison