Simple question about bear put spreads

Discussion in 'Options' started by surfer25, Apr 28, 2009.

  1. Hi,
    Can you please tell me where the maximum profit potential is reached on either a bear put vertical spread or a bull call vertical spread where the long leg is deep in the money and the short leg is a bit out of the money?
    Thanks.
     
  2. MTE

    MTE

    At expiration the maximum profit potential is reached when the short strike is ITM.
     
  3. 1) Before expiration, with the bear-put-spread, you want the market to go to zero immediately after you put on the position.
    2) With the bull-call-spread, you want the market to go to "infinity" immediately after initiating the position.
    3) It also helps to have a volatility implosion that should collapse the short-option more than the long-option.
     
  4. As posted by MTE, maximum profit at expiration occurs when the short strike is ITM.

    Before expiration is a different story and will depend on the IV of the options. The higher the IV, the more the underlying will have to go ITM in order to approach the maximum profit.
     
  5. Thanks for this answer. I actually knew all of what was posted so far, but was wondering if there is an easy way to figure out how much ITM the underlying has to go for maximum profit to be reached on a specific bear or bull spread.

    I am trying to determine the price point the underlying has to get to prior to the spread expiration such that maximum (or close to maximum) profit has been reached and the spread is no longer worth holding.

    Can anyone offer any additional information regarding determining this figure?

    Thanks.
     
  6. Look at it this way. Under what conditions would you expect that a market maker is going to pay you $5 for a spread that can never be worth more than $5?

    the answer is NEVER.

    It can never move far enough ITM for you to be able to exit at the maximum.

    If you are willing to sell @ $4.80 or $4.90, then that's possible. You will be able to sell the spread and collect $4.90 when the corresponding put spread is available @$0.05. In other words, the box can be bought @$4.95.

    Mark
    http://blog.mdwoptions.com/
     
  7. The answer is still the same... The higher the IV, the more the underlying will have to go ITM in order to approach the maximum profit. So that means the number will vary from spread to spread.

    The bonus points answer is that you need a web site or stand alone program into which you can input your option data and model a P&L graph. I haven't used it in ages but the Options Toolbox which is available for download at the CBOE might do the trick. Or you could grind it out with a pricing formula in a spreadsheet.