Vertical spread vs underlying, p/l calculation

Discussion in 'Options' started by Rocko1, May 9, 2007.

  1. Rocko1


    OK I'm halfway through "Option Volatility and Pricing, Advanced Strategies", and started paper trading. Had the following bearish put spread in place

    Entry day-
    Underlying- CMI @ 92

    1) long, Strike-90
    2) short, Strike- 85

    Two days later-
    Underlying- CMI @ 90.1~
    Both positions are in the red, despite that the underlying's gone about $2 toward the green, yet both options are in the negative.

    Can anyone give me the formula in calculating the necessary move in the underlying to hit the max profit with respect to the underlying value at the entry of the spread?

  2. Max profit really wont be hit until the stock closes below the short strike at expiration or moves super ITM before expiration. The time value in the short put keeps it from reaching $5.00 max value (on the bid to close at least) until you get to expiration and spread is ITM.

  3. Rocko1


    thanks OC,
    Is there much difference to the distance the underlying must move to hit max profit whether the entry of the vertical spread optoins were both OTM, ITM, or 1 ITM and 1 OTM?

    Before expiration, that is.
  4. Please tell me you are not going to trade with real money anytime soon. No offense but based on your questions you have a way to go. You are trying to equate a delta move of the underlying directly to the maximum profit of a specific strategy. Basically your question is a non sequitur; you need to learn more about options and then you will see there is no simple "formula" for which you are looking. You need to understand all the greeks and how they interact. As Coach said, a vertical wont reach the max or min until expiration or it is way in the money, or way out of the money respectively; how much in or out of the money depends on the particular options and corresponding greeks.
  5. Rocko1


    Thanks Opt,
    Yes the question had sounded naive as if I wanted some simple formula. And no I don't plan to do anything with real money til I understand how it works exactly.

    The only way to really accurately estimate the underlying movement requirement would be through the calculator like the one at right?
    It was my mistake to think there'd be an easy way.
  6. The simplest thing to do is to plot your position on a risk graph and see the value of your spread change as you plug in different price values/iv/time to expiry etc.. It's a good learning tool.
  7. Yes, you need an option theoretical calculator to show you how an option value changes in relation to time, stock & vol movement, etc.
    Under Tools & Literature has a calculator and position simulator; most people like to graph out their positions.
  8. Rocko1


    Thanks guys, the graphs do help more than the simple calculators.