I entered a Bull Call Spread of 215/220 of Face Book. When I entered this trade on TOS, it said my max profit is $245. However, when the stock price of Face Book got to about $221.70, I closed my position but the amount of $285 was credited to my account. I thought my max profit should only be $245? Why is there a difference between the max profit when the trade was entered compared to the actual profit received?
Bull Call Spread - Maximum profit
- Thread starter moolah
- Start date
You need to tell us what you paid for the spread and what you sold the spread for. Not enough info to help you...
With the limited information you are giving I'm guessing you paid 2.55 for the spread, which would mean if the spread went to its max value of 5, you would make 2.45.
When you said you had $285 credited to your account, that would imply you sold the spread for 2.85. This would be the credit you received, not your profit.
So that would suggest you paid 2.55 sold for 2.85 and made .30 on the spread.
When you said you had $285 credited to your account, that would imply you sold the spread for 2.85. This would be the credit you received, not your profit.
So that would suggest you paid 2.55 sold for 2.85 and made .30 on the spread.
I paid $255 to enter the trade, sold at $285
I believe FSU covered it well..
When I said you make 2.45, that would be your max profit if the spread went to its max value of 5. You paid 2.55, if the spread went to 5, you would "make" 2.45 (bought for 2.55, sold for 5)
You bought the spread for 255$, the width of your spread was 5, or 500$ (the width is 220-215=5 with multiplier of 100 equals 500). Therefore 500-255=245$ which is your max. profit.
However, you decided to sell it at market rather than hold until expiration. You sold it for 285$ but you paid 255$ for it remember? So 285-255= 30$. So you made thirty bucks kiddo no free lunches here either..
However, you decided to sell it at market rather than hold until expiration. You sold it for 285$ but you paid 255$ for it remember? So 285-255= 30$. So you made thirty bucks kiddo no free lunches here either..
If you held the spread to expiration and both calls expired in the money, you would realize the max amount of 5 for you spread. Since you paid 2.55 for it, you would make 2.45. ($245).
The risk of holding through expiration is your short side finishes just out of the money and you come in long stock when your long calls are exercised. Even if both are in the money, there is a chance your short calls are not exercised and you come in long stock.
Some brokers will sell out your position on expiration day if you don't have the money to cover the exercise.
This is why I would suggest selling to close your spread before the end of expiration day.