I was putting together some spreads for a look this morning and got my strikes a little wrong and noticed something strange. The B/A spread for DEC 70/DEC 75 put credit spread is -5.20/-4.80. Isn't 5.00 the maximum risk for this spread at expiration? I'm sure I couldn't get the 5.20 credit, but the 5.00 credit is the mid point. Wouldn't this be a risk free trade? What's the catch? Would I ever get filled? Is the probability of assignment high?
Maximum loss is $5.00 minus the credit, in this case $4.80 (not $5.20). Loss = $0.20 100% if they are ITM, so a loss of $0.20 plus commisions is a sure thing. You might be getting the Bid and Ask switched around.
Yes, 100% if I let them expire in the money, but in the case of a put credit spread, if the underlying moves higher, I can buy back the spread at a lower cost. If it sinks lower, I can hold until expiration and get $5.00 minus the $5.00 credit = $0? I guess I'll post a screenshot next time I see this and someone can point out what I'm missing. Thanks for the reply though, I do appreciate it.
FRE @ $66.41 Sell Dec 75 @ $8.80 Buy Dec 70 @ $4.10 Total Credit $4.70 Also I wouldn't consider 1 strike ITM to be DITM.
OK, you're looking at the quote now and you're correct. I'll post a screen shot the next time I see it. I have a feeling an MM would never fill the spread @ 5.00. Maybe I'll try sometime for grins.