I don't understand this options

M

met1989

Hello
Im looking at the option chain 7 days out from today and and the calls -1C 3135 is 244.20 and+1 C 3140 is 243.80 which creates a credit of 495$ so if its in the money and expires in the money why do i end in a loss?attached is the vertical ?
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No. If you sell something for $4.95 that rises to $5.00, you don't get to keep the credit money. You get the difference. The difference is a loss. If you bought the spread for 4.95 and it settled ITM, you would profit from the rise to 5.00. It is likely commissions will wipe out most of that and this would risk losing 4.95 to make less than 0.05 if the market drops.

met1989 said:
but then i got 4.95 when i sold so if i lose 0.05 i should be left with 4.9 no?
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Robert Morse said:
No. If you sell something for $4.95 that rises to $5.00, you don't get to keep the credit money. You get the difference. The difference is a loss. If you bought the spread for 4.95 and it settled ITM, you would profit from the rise to 5.00. It is likely commissions will wipe out most of that and this would risk losing 4.95 to make less than 0.05 if the market drops.
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Robert Morse, as usual an excellent, always ready, Helpful Sponsor. Thanks for always contributing.
 
Robert Morse said:
No. If you sell something for $4.95 that rises to $5.00, you don't get to keep the credit money. You get the difference. The difference is a loss. If you bought the spread for 4.95 and it settled ITM, you would profit from the rise to 5.00. It is likely commissions will wipe out most of that and this would risk losing 4.95 to make less than 0.05 if the market drops.
More...

...and in the meantime, the bid-ask spread in those things is going to be very very wide, while the traffic in them is going to be very very low -- so assuming that you get hit anywhere near your target is pretty foolhardy: spread and commissions will put you *dollars* underwater.

met1989, if you have any real interest, sit down and take a look at the bid-ask spread(s) and volume-traded for calls and puts OTM, ATM, and ITM -- lots of good market lessons awaiting there, for free.
 
met1989 said:
Hello
Im looking at the option chain 7 days out from today and and the calls -1C 3135 is 244.20 and+1 C 3140 is 243.80 which creates a credit of 495$ so if its in the money and expires in the money why do i end in a loss?attached is the vertical ?View attachment 219536
More...

Another way to look at this is you take in a $495 credit.

Imagine you only had the short position. If ^SPX continued to rise beyond your short call (3135) you would be liable for theoretically unlimited risk. You'd continue losing money as the price rises beyond your strike.

You've bought insurance on your short here. The long call at 3140 caps your loss at exactly the delta between the short and long position (3135 - 3140 = 5). Between 3135 and 3140 you'll lose chunks of the $500 maximum loss, up to the maximum loss when the price meets or exceeds 3140.

You're instantly losing according to the measurements because the SPX is currently trading at 3380, and so you're basically just throwing money into a firepit. I'd be surprised if there was even enough liquidity in those options to make this mistake.


This is a good lesson for you that you don't yet understand enough about verticals to trade them. Hit the books.
 
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