Hi all, I've been playing around with OptionStrat. I have an account with IB with Level 1 approval (covered calls, and cash secured puts). One of the things I've noticed on OptionStrat is that when I add a long put to a cash secured put and turn it into a bull put spread, the collateral amount decreases. My return (in terms of % of collateral) also increases. For instance, I'm looking at the July 21st 4 strike put for AMC. To do a cash secured put, I have to set aside $400. If I add a long put at the 3 strike, my collateral decreases to $100. The long put costs $34. My return at expiration increases from 20% to 46% by adding a long put. Is this an illusion? How is this possible if I still have to set aside $400 for the CSP plus an additional $34 for the long put? Does OptionStrat assume I'm doing a bull put spread using margin? Thanks
A Level 1 acct does not include spread trading. Yes, the OptionStrat calculation assumes you have an acct that includes spread trading. FYI: spread trading in a non-MarginAcct, ie. in a CashAcct, is possible too with some brokers --> for example the broker TradeStation offers it. See the last column of the table there that shows the formula for required cash: https://www.tradestation.com/pricing/options-margin-requirements/ The Requirement formula for both MarginAcct and CashAcct is the same: Requirement = Net Premium + (Strike Price Short Put – Strike Price Long Put) x Contracts x Multiplier Level1 means, you can create a Put Bull Spread, but it's just virtual, w/o reducing the cash or margin requirement. See also https://optiontradingpedia.com/options_account_trading_level.htm (has 5 levels) (ATTN: the information there is maybe not 100% correct) And Canada sems to have a different classification of these Levels (has 4 levels): https://www.questrade.com/learning/questrade-basics/advanced-options-trading/options-levels And here's yet aother one with just 3 levels , and it lists many brokers that have different # of levels, meaning it's broker dependent : https://www.projectfinance.com/options-trading-levels/
As noted above, level 1 does not include spread trading. With most brokers, you won't get level 2 approval unless you also apply for a margin account. So at most brokers, you have to have a margin account to trade put spreads. You don't have to use margin to actually trade spreads. Using margin implies that you are borrowing money, using stock or other marginable securities as collateral.
Looks like OS is simply calculating premium/max loss 4 put price=.80 3 put price=.34 4/3 put spread = .46 max return 4 put = .80/4= 20% Max return 4/3 PS = .46/1= 46% makes sense,but do not be mislead by the returns