$10,000. Risk @ 10% = $1,000 / $250 per contract= 4 contracts to trade For a credit spread, isn't this $400 in risk with a $1 wide spread? Also, I keep hearing people talking about getting a 1:1 risk reward with credit spreads...how do you ever get 1:1 on a credit spread unless you go ITM? AND if I'm going ITM with a credit spread, then why not just do a debit spread?
Just FYI: there are many different formulas for calculating risk : reward. This fact surely can be the source of the confusions and differences...
Yea,if you sell 4 One point verticals,the max risk(European option) is 4,i.e 1 point per verical.Of course,you hopefully didn't sell the vert for zero,so some may say Risk = strike differential minus credit taken in.. Do you understand the risk/reward of selling a 5 point put vertical vs buying the exact same strikes/expiry call vertical? Would you rather buy a 5 point call vertical at 2.60 or sell the same strike expiry put spread at 2.50??? Ignore divs
How are they equivalent? The short vertical performs better than the long vertical. Price drops to $453.36 Short vertical spread: $164.31 Long vertical spread: $30.45 The short vertical also performs better if the price goes against you. Price increases to $457.38 Short vertical spread: $-325.77 Long vertical spread: $-419.99
Reading a book does jack for understanding options. It's like reading a book on mechanics and then trying to do a break job. If you want to understand anything you have to do the practical before the theory.
I just created a box with a $2 spread at a cost of $273.50 The spread is only $200 so I'm down 73.50 before we even consider fees. Show me a current example of a box spread that locks in a profit.