price of vertical put spread does not equal price of each leg. why?

A

anarchocaps

When I use my trading platform to find vertical put spread prices (optionshouse), I can find a price to buy a given put spread. But when I look at the price of the individual long put and subtract from it the price of the individual short put (exact same parameters as the put spread being compared to), the net is not what the platform shows as the price of the put spread. I called them and could not get an explanation. Is the difference between the "pre-built" spread and the net of building the spread myself supposed to be the additional commission? Seems like the net premium of building a put spread myself should be the same price as the price of buying the spread?

Ultimately I am wondering exactly how the premium of the vertical spreads that are displayed are being calculated.
 
What you are seeing in your software is the bid/ask and mid value of the spread. With verticals, I have found to never trust what the software is showing. You can pull up the call equivalent spread and see what it is going for (ex. if you are buying a put debit spread, see what the equivalent call credit spread is going for). Outside of that, the only true price is paying the ask on the long leg of the vertical and selling at the bid on the short leg.
 
thanks, dolemite. so if the prices can't be trusted, that is disappointing, because I am curious as to what the point of the data is.

I envisioned being able to look at a table of different spreads, and on the table see accurate prices of each spread combination with its max gain, loss, and breakeven. That is apparently not the case, unless it is just a weakness of optionshouse?
 
I cannot speak for your broker specifically, but many platforms take the mid-price of each option for a spread and not for individual options.

The assumption is that for an individual option, the counter party / market maker will need to make an offsetting long/short trade. For a spread, you are long one and short one, and, therefore, it is theoretically easier to fill as there is less delta exposure to hedge for the counter party. (I am taking some liberties here to keep it simple).

Although you are not entirely inaccurate when you say the prices cannot be trusted, I would look at it differently. With different expirations and strikes, there is likely not a recent trade of the specific spread you are looking at, thus there is no "actual price". Instead, the broker is making an estimate for where a trade could get done. Ultimately, you have to put in a limit order and see if you can get a fill at a price that is acceptable to you.
 
What is the security? If you're looking at SPX spreads, for example, there is a complex order book which quotes the spread itself independent of the leg prices and you can get a guaranteed execution of the entire spread, usually just past the mid of the spread quote. If you looked at the individual options you'd typically see a much wider spread between bid and ask.
 
Hmm, usually the broker would construct the bid/ask of the spread with the bid/ask of individual legs and if there is an active market in the spread, it would be that market... which would be tighter than that of individual prices combined.

If no active market is present, the bid of the spread would be "bid-long-put" minus "ask-short-put", and the ask price of the spread would be "ask-long-put" minus "bid-short-put"...

What do you regard as 'the price'? If you merely look at the theoretical price the broker gives you, then that can be way off...
 
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