Hello, I wonder a little about the breakeven point for a Bull credit spread. Let us assume the below for AAPL (Liquid options) Current spot price: 103 SELL strike 100 Credit: 0.70 BUY strike 97 Debit: 0.20 Net credit: 70 dollar - 20 dollar = 50 dollar What I have learned when reading examples and looking at videos is that the breakeven point is the SELL strike price 100 - net credit received which would be at: 99.5 dollar. Now is my question: If the underlying goes down to 99.5 dollar and we exit the credit spread here: Is any of the below more accurate? 1. Will that actually in practic be breakeven or is the above just an example and then it depends on what the option prices ACTUALLY are at that point in time when the underlying price reaches 99.5 dollar so it is just an approximate? 2. It depends on what the option prices actually are trading at that point when the underlying price reaches 99.5 dollar but on average over let us say 100 trades, the example above will be very accurate. Sometimes exactly breakeven, sometimes a small loss and sometimes a small profit.
You have to account for time value if you exit before expiry. On close, that spread will be worth 50$ yes, and you would break even, transaction costs aside.
I am not exactly sure how you ment. When accounting for timevalue, what scenarios can that mean. Can that mean that we can suffer a great loss on the price that we have as breakeven at entry(99.5 dollar)? I am not sure exactly how this works. Or should it in the long run over a large number of trades be about the breakeven point after all? >> On close, that spread will be worth 50$ yes, and you would break even. On what close?
you dont have to calculate it manually, you can use popular options analytical software to see your p/l curve and breakeven point from there, you can see your profit/loss graph on expiration day (expiration line) and profit/loss graph on any given day (t+x line), including today (t+0 line) then you can see what happen on your options spread's price when underlying hit 99.5 on day x --- please google about options greeks, it will help your understanding about options pricing
I am creating a backtesting software so I need to calculate the breakeven point somehow. Analytical softwares will not help in this case I beleive. I know about the greeks but it still doesn't really answer the question. I go back to the example where all "credit spread videos" I have seen clearly explains where the breakeven point is in a credit spread. They clearly states that the breakeven point is at: "The SELL strikeprice - net credit received" In my example, that is at 99.5 dollar. As a first simple question is that true in practic or not, - or is it very close to that in practic etc? I think I need some hard statements to begin with.
Breakeven is calculated to be AT EXPIRATION when no time value exists. Prior to expiration your breakeven could be anywhere near that point depending on value of options and b/a spreads.
I am thinking of an example. If looking at this picture: http://www.bilddump.se/bilder/20161013174825-195.252.32.111.png Assume at entry the underlying is trading at: 116 dollar exactly. If we entry a put credit spread 1st January, where the blue rectangle is with values: SELL strike 112 for Credit: 0.25 BUY strike 111 for Debit: 0.17 Netcredit: 25 - 17 = 8 dollar On 10th January. Let us assume that the underlying is trading at 112 dollar exactly(At the money) Now I wonder/think that the red rectangle would REPRESENT those values approx? Let us exit the credit spread now: Buy back strike 112 for: 1.38 Sell strike 111 for: 0.93 Wouldn't then this be accurate "At the money" and could this be a fair example or am I not thinking correctly? 1.38 - 0.25 = 1.13 (Loss) 0.93 - 0.17 = 0.76 (Profit) Total Loss: 76 - 113 = -37 dollar