Credit spread 1:1

W

wxytrader

$10,000. Risk @ 10% = $1,000 / $250 per contract= 4 contracts to trade

For a credit spread, isn't this $400 in risk with a $1 wide spread?

Also, I keep hearing people talking about getting a 1:1 risk reward with credit spreads...how do you ever get 1:1 on a credit spread unless you go ITM? AND if I'm going ITM with a credit spread, then why not just do a debit spread?
 
Just FYI: there are many different formulas for calculating risk : reward.
This fact surely can be the source of the confusions and differences...
 
Yea,if you sell 4 One point verticals,the max risk(European option) is 4,i.e 1 point per verical.Of course,you hopefully didn't sell the vert for zero,so some may say

Risk = strike differential minus credit taken in..

Do you understand the risk/reward of selling a 5 point put vertical vs buying the exact same strikes/expiry call vertical?

Would you rather buy a 5 point call vertical at 2.60 or sell the same strike expiry put spread at 2.50??? Ignore divs


wxytrader said:
$10,000. Risk @ 10% = $1,000 / $250 per contract= 4 contracts to trade

For a credit spread, isn't this $400 in risk with a $1 wide spread?

Also, I keep hearing people talking about getting a 1:1 risk reward with credit spreads...how do you ever get 1:1 on a credit spread unless you go ITM? AND if I'm going ITM with a credit spread, then why not just do a debit spread?
More...
 
destriero said:
Because they are equivalent (box arbitrage).
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How are they equivalent? The short vertical performs better than the long vertical.

Price drops to $453.36

Short vertical spread: $164.31
Long vertical spread: $30.45

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The short vertical also performs better if the price goes against you.

Price increases to $457.38

Short vertical spread: $-325.77
Long vertical spread: $-419.99

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taowave said:
You need to read a basic book on options and not over think it with vol crush..
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Reading a book does jack for understanding options. It's like reading a book on mechanics and then trying to do a break job. If you want to understand anything you have to do the practical before the theory.
 
taowave said:
case in point..you dont understand simple Box Arbitrage or equivalant positions
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I just created a box with a $2 spread at a cost of $273.50
The spread is only $200 so I'm down 73.50 before we even consider fees.

Show me a current example of a box spread that locks in a profit.
 
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