First response from Chat GPT is not bad. The decision of a long leg that is ATM or ITM and short leg OTM is interesting. Both strikes could easily be chosen to be OTM, the location of the strikes is really based on personal conviction and investment thesis.

Illustrating this, let's look at an example two spreads of NVDA, which is at $128.70 right now:

Spread #1 - ITM long leg, OTM short leg

- A $130 put costs $13.90 and has a delta of -0.43

- A $126 put can be sold for $11.75 and has a delta of -0.39

Effective delta is 0.04, cost to enter is $215 (which is max loss), max revenue is $400 (max profit is $400 - $215 = $185)

Spread #2 - OTM long & short legs

- A $110 put costs $5.50 (delta of -0.23)

- A $106 put can be sold for $4.30 (delta of -0.20)

Effective delta is 0.03, cost to enter is $120 and max profit is $280 in this case.

Spread #2 is more risky as it requires more price movement, though the payout is more than 200%, while the payout on the first spread is roughly 80% (both are VERY solid payouts. The catch is how many times in a row can a person do this? These trades require a person to be correct at least 30% of the time).

It does not seem like the Chat GPT is considering delta exposure in case your market thesis is correct. Perhaps that is a fault of the prompt, and we should have simply asked for a positive delta value.

Though, for this first Chat GPT response, there are few things that are kinda wrong.

> "Complexity: Requires understanding of options and managing multiple legs of the trade."

- both legs are typically managed at the same time. The overall complexity is a fair point, and not mentioned is that expiry requires more active attention compared to positions that do not have an expiry.

> Considerations - Volatility: Be aware of the implied volatility of the options, as it can affect the premium.

This is not important for us. We are choosing a narrow strike range in order to offset volatility changes between short and long legs. The overall value of a spread does not change that much when volatility changes. When selling single leg options, knowing how the premium can change is super important, much less so for put spreads.

> Considerations - Market Conditions: Ensure the market sentiment and fundamentals support a bearish outlook.

This is a bit odd. If your investment thesis is a bearish outlook, then that should be treated as an assumption. I suppose a better consideration is "be sure to consider that your investment thesis could be incorrect, in which case you will be looking at a 100% loss. Do not invest money you cannot afford to lose, and this money has a high chance to be completely lost"

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Second response from Chat GPT is again really interesting.

Though, it's straight up wrong when it comes to synthetic short. Synthetic short have unlimited loss potential [1] - that comes from the short call. If price increases by a lot, the price of the long put goes to zero and the price of the short call increases without bound.

[1] https://www.optionseducation.org/strategies/all-strategies/s...