Maxloss in calculation vs TOS not the same

[Derrenoption]

That is interesting! I will try to experiment with what I have, perheps I can solve it by try different scenarios and compare it to TOS. I just try using same and different expirations to see what could be possible and learn something from that.
Thanks Step for your help!

 

[stepandfetchit]

The single expiration handling for Max Risk is simple, merely pick worst case of the Expiration Risk!

 

[Derrenoption]

(deleted)

 

[Derrenoption]

I am looking at this example and still can't figure out how the maxrisk is calculated:
http://www.bilddump.se/bilder/20161228012755-195.252.32.111.png

I use 2 different strikes with different expirations. When putting the cursor at strike 31 there is a maxloss of
-76.74$. This should then be for the nearest expiration if that is the default in TOS.

But shouldn't the maxloss at strike 31 be atleast -$500(not including the buystrike) since the sellstrike is loosing all its value at date 2/18/17 ?

26-31 = -5$
= -5$ * 100 = -500$

 

[water7]

change your P/L line to feb 16th or 17th

things to note:
- those lines are not real / accurate measures, just an estimation
- your max risk should include the execution and slippage cost (in extreme condition)
- try to understand how volatility affect time spreads

---
what is the logic behind this trade?

thanks

 

[stepandfetchit]

A couple things to consider:
1) What are you looking for?
2) What are you displaying in TOS?
I suspect, closer examination will show that (1) is NOT equal (2).
Your TOS "Risk Profile" is merely showing results of expected PnL with a number of assumptions on a specific date.
Any time one attempts to do this at a point that is NOT at expiration, you are assuming the implied volatility of the options will be a some value! This should never be used when trying to determine MAX loss without accounting for what can occur with volatility.
This is why expiration is typically used for MAX Risk/Loss computations, as volatility is zero at expiration.
Since your further dated option is a long call, for MAX loss purposes, you could consider IV==zero for that option at the time of the earlier dated expiration, which would be worst case, as IV can't go negative. (Basically convert the further dated option to Intrinsic value only for MAX loss calculation for this odd position.) --
You may want to try this in TOS to observe a more realistic max RISK on that date:

You are only able to modify the IV as Vol Adj percentage in TOS with this mechanism, so push it till the expiration graph has no curvature (IV removed). -- I removed the IV for the further dated option here.

 

[Derrenoption]

1) What are you looking for?
2) What are you displaying in TOS?

Any time one attempts to do this at a point that is NOT at expiration, you are assuming the implied volatility of the options will be a some value!

(I know that volatility affects the price of the option. But let us put that aside because it is some other basics that is not clear)
I think there is some basic/ thing I am not exactly sure of but I think is. What I try to see is approx. what the "maxrisk" is at the nearest expiration: (2/18/17).

As I entered the trade when spotprice was at 30.67. For the sake of the example and simplicity. Let us say we entered the trade when spotprice was exactly 31. Now I wonder what the maxrisk is if price is at 31 on: 2/18/17

1. I got premium from strike 26: 4.35$
2. I payed 1.27 * 3 contracts for strike 31: 3.81$

3. As the option we bought has an expiration: 16 JUN 17 I will for simplicity/sake of example just assume that those options has lost 10% of their value:
-0.381$

4. The real question is here. We received 4.35$ premium from strike 26, - but the option ENDS 5$ ITM. Does this mean that we have a loss of:
4.35$ - 5$ = -0.65$ ?

5. Finally, as I know IV has its importance but ignoring this for the sake of the example and assuming the loss of -0.381$
Is then a TOTAL loss of -103.1$ correct at the first expiration: 2/18/17

(-0.65 + (-0.381$)) * 100 = -103.1$

 

[stepandfetchit]

I'm curious if you have resolved what you were seeking yet!
With your last post, I got lost on what you were trying to figure out.
The original topic of Maxloss seems to have no correlation to your final post, so am "guessing" your question has changed.
The estimation of PnL at some future point in time (which seems to be your new focus) bears little relationship to a position's MaxLoss, unless the position is liquidated at that point, then you would also need to know the liquidation value (easier to determine if option expires, more problematic if not).

For the original position, the worst case would be a big move up by expiration, resulting in the short option holder PUTting the stock to you at some high price (this has no upside bound). Then, the stock drops to zero, resulting in total loss of that cost, plus your CALL becomes worthless. So total Loss is Cost of the 3 Calls - Premium received for the 1 PUT + Infinity (or how ever high the stock went) + commissions and assignment fee. So, this position as you specified it has unlimited risk.

Any position, should have a plan for how it is exited to prevent such a scenario, but that is missing from your posts.

 

[Derrenoption]

I think I know about the scenarios. Next step should be to create exit scenarios and rolling the short side before its expiration if the trade still is interesting.

I beleive only this was the question which I got confused of. I beleive the below statement is correct which would be the only thing I like to confirm:

We received 4.35$ premium from strike 26, - but the option ENDS 5$ ITM. Does this mean that we have a loss of:
4.35$ - 5$ = -0.65$ ?

 

[stepandfetchit]

Not sure if my response will help, but here is how I interpret this last post.

To restate this question:
1) Sell 1 CALL option at 26 strike for price of 4.40, collect 440 - commissions.
2) Hold to expiration, and at expiration price of underlying is $31?

For this case, so you are assigned 100 shares with a cost of 31*100=3100 + commission and assignment cost.
Since you will be left holding the stock, you still have no guarantee the stock will not decline before you are able to liquidate it.
Insufficient plan detail to determine what a real loss could be, as you are still holding a long stock position. If you are assigned before the close, and are able to quickly liquidate your position, you may get out with a loss similar to your calculation + commissions, slippage, and assignment fee.