Options spread profile - Max profit value

T

traderwald

Hi guys,

Why does the profile change when I increase from 1 contract vertical spread to 2 contracts of vertical spread (why did max profit more than triple ? though the trade size only doubled):

1. 1 Short and 1 Long Call:

Trade

upload_2019-1-10_5-17-24.png


Profile:

upload_2019-1-10_5-18-2.png



2. 2 Calls short and 2 Calls long:

trade


upload_2019-1-10_5-18-45.png



Profile: (why did max profit more than triple ? though the trade size only doubled

upload_2019-1-10_5-19-14.png
 
I can speak for TWS. I want to impress upon you that if you can’t quickly understand the risk/reward of a simple vertical call or put spread you might not be ready to trade them. The math is very simple. Also, to be conservative, assume max loss is correct but always assume you exit before max profit.
 
Robert Morse said:
I can speak for TWS. I want to impress upon you that if you can’t quickly understand the risk/reward of a simple vertical call or put spread you might not be ready to trade them. The math is very simple. Also, to be conservative, assume max loss is correct but always assume you exit before max profit.
More...


Hi Robert,

Still beginner in the option strategies and trying to learn on paper trading account as of now. uep, Math I thought was simple till I saw this and got confused a bit of my understanding. Agreed with your suggestion about assumption of max profit.

Please let me know if the below example is correct for a Bear Call Spread (assume same strike prices for both the trades)

Trade 1:

Strike 100 - Short call - Premium $4
Strike 120 - Long Call - Premium $2

1 Short call - $4 *50 = $200
1 Long Call - $2 *50 = $100

Max Profit: $200 - $100 = $100



Trade 2:

Strike 100 - Short call - Premium $4
Strike 120 - Long Call - Premium $2


2 Short calls - $4 * 50 * 2 = $400
2 Long calls - @2 * 50 * 2 = $200

Max Profit: $400 - $200 = $200


i.e.

Size(Trade 2) = 2*Size(Trade 1)
Max Profit (Trade 2) = 2 * Max Profit (Trade 2)

Is this correct ?

Not sure why the calculation in my first message screen shots show not a similar multiple.
 
Last edited:
guys...for real? look at his pictures.

In the second spread market either just shifted and he got a different price or he messed up picture selection.

First spread is -1.35 by -1.20
Second one is -3.20 by -2.30

so what's the big deal?
 
Your examples of Trade 1 and 2 require me to make assumptions. Are they the same month, what are the strikes, etc. I suggest you read more.
https://www.lightspeed.com/trading-education-center/

I do not see a symbol on the TWS strategy builder, so I will assume XYZ where is option is for 100 shares.

XYZ Jan 2019 2620/2650 call spread is a 30 point spread with the same expiration. Buying it (Bull Spread) is a debit spread where you risk is limited to the debit. Selling it (Bear Spread) is a credit spread where the risk is the difference between the credit you receive and the difference between the strikes, or in this case 30 points. For the sake of this example, let’s say you sell it for 2.50. You are risk $2750 and can earn $250. I’m going to ignore any fees or any process to exit early. They say your probability of success is 90%. If that is correct:

10%-$2750 = ($275)
90% *$250 = $225

Net expectancy is -$50 with all these assumptions without costs. Do you think this is a good trade? Does that mean you will lose money, no. If you do the opposite, where the expectancy is +$50, does that mean you will make money, no. It makes a lot of assumptions that might be wrong, but in general a positive expectancy combined with a market opinion also based with some process, would add to your likelihood of making money.

If I did this all wrong, I'm sure someone will point that out. I do not do this math before I enter a trade. I focus on what I think the symbol will or won't do over a period of time, then look for a strategy that fits my expectation. Not the other way around. I find with my trading experiance going back 25+years, this is the best way for a retail trader to make money with options.
 
MrMuppet said:
guys...for real? look at his pictures.

In the second spread market either just shifted and he got a different price or he messed up picture selection.

First spread is -1.35 by -1.20
Second one is -3.20 by -2.30

so what's the big deal?
More...


Hmm not sure why the spread has changed. I don't think the market shifted. It was just a second or so because I just changed the number under RT (in the second trade, the first pic) from 1 to 2 and clicked the profile button again). And the first pic under the second trade shows the same bid / ask as the first pic under the first trade.
 
Robert Morse said:
Your examples of Trade 1 and 2 require me to make assumptions. Are they the same month, what are the strikes, etc. I suggest you read more.
https://www.lightspeed.com/trading-education-center/

I do not see a symbol on the TWS strategy builder, so I will assume XYZ where is option is for 100 shares.

XYZ Jan 2019 2620/2650 call spread is a 30 point spread with the same expiration. Buying it (Bull Spread) is a debit spread where you risk is limited to the debit. Selling it (Bear Spread) is a credit spread where the risk is the difference between the credit you receive and the difference between the strikes, or in this case 30 points. For the sake of this example, let’s say you sell it for 2.50. You are risk $2750 and can earn $250. I’m going to ignore any fees or any process to exit early. They say your probability of success is 90%. If that is correct:

10%-$2750 = ($275)
90% *$250 = $225

Net expectancy is -$50 with all these assumptions without costs. Do you think this is a good trade? Does that mean you will lose money, no. If you do the opposite, where the expectancy is +$50, does that mean you will make money, no. It makes a lot of assumptions that might be wrong, but in general a positive expectancy combined with a market opinion also based with some process, would add to your likelihood of making money.

If I did this all wrong, I'm sure someone will point that out. I do not do this math before I enter a trade. I focus on what I think the symbol will or won't do over a period of time, then look for a strategy that fits my expectation. Not the other way around. I find with my trading experiance going back 25+years, this is the best way for a retail trader to make money with options.
More...


Thank you Robert.

Please assume same month and other items - the only change is the number of contracts traded.

Also, I am just looking to understand the prices etc. at first rather than deciding if its a good trade as of now. Just looking at various combinations to get better understanding of the options strategy that is used on this.

Appreciate your explanation of whether it is a good trade and the further details.
 
etrades said:
Hmm not sure why the spread has changed. I don't think the market shifted. It was just a second or so because I just changed the number under RT (in the second trade, the first pic) from 1 to 2 and clicked the profile button again). And the first pic under the second trade shows the same bid / ask as the first pic under the first trade.
More...


Well, it doesn't really matter what you think.

First quote details give you a -1.35 by -1.20 market and the second one a -3.20 by 2.60 market. Those two are different and that's it.

There are only a handful of reasons why:

1. Prices changed
2. you messed up something with the pictures
3. Size in one leg is not sufficient to complete your order.

When I'm looking at it, I asume #3, since you cannot trade 0.5 options.
I don't know how this PoS TWS calculates spread prices, but both legs have only 1 option offered and you wanted two spreads.

Since we cannot see the book for the 2650 call, I guess TWS just takes the next best price to display a market and gives you an average.
 
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