HOW TO CALCULATE VERTICAL SPREAD PROFIT and LOSS – Lesson 14

OPTIONS IS NOT A GUESSING GAME !

You always know the MAXIMUM profit you can make

AND

the MAXIMUM amount you can lose before opening an order!

HOW TO CALCULATE BULL CALL VERTICAL SPREAD – PROFIT

MAXIMUM PROFIT (Cannot make more than this):

1. Must be in-the-money

2. Subtract the OPEN premium from the CLOSE premium X 100

Example to calculate profit:

Stock Price: $58.15
OPEN Order: CALL – Ask 55.00 @ 3.50
CALL – Bid 57.50 @ 2.00 = $1.50 Premium
X 100 = $150.00

Stock Price: $63.50 —
CLOSE Order: CALL – Bid $57.50 @ 2.50
CALL – Ask $55.00 @ 5.00 = $2.50 Premium
X 100 = $250.00

CLOSE premium ($2.50) Minus OPEN premium ($1.50) = $1.00 X 100 = $100.00

WANT:
1. Stock price to increase
2. Stock price to pass both strike prices.
3. Both strike prices in-the-money.

Question #1:

To calculate the profit on the above Bull Call Spread order:
___A. Subtract $58.15 from $63.50
___B. Wait until you receive your monthly statement
___C. Subtract the open premium from the close premium X 100

Question #2:

To calculate the premium to OPEN the above Bull Call Spread order:
___A. Subtract $55.00 from $57.50
___B. Subtract $2.00 from $3.50
___C. Subtract $55.00 from $58.15

HOW TO CALCULATE BULL CALL VERTICAL SPREAD — LOSS

MAXIMUM Loss (cannot lose more than this):
The initial amount you paid for Premium when opening
the spread ($1.50 X 100 = $150)

HOW TO CALCULATE BEAR PUT VERTICAL SPREAD – PROFIT

MAXIMUM PROFIT (cannot make more than this amount)

1. Must be out-of-the-money

2. Subtract the OPEN premium from the CLOSE premium X 100

Example to calculate profit:

Stock price: $41.00
OPEN Order: PUT – Ask $40.00 @ 3.50
PUT – Bid $35.00 @ 2.00 = $1.50 Premium
X 100 = $150.00

Stock Price: $34.00
CLOSE Order: PUT – Ask $40.00 @ 7.50
PUT – Bid $35.00 @ 2.50 = 5.00
X 100 = $500.00

CLOSE premium ($5.00), Minus OPEN premium ($1.50) =  ($3.50 X 100)= $350.00 Max Profit

WANT:
….Stock price to DECREASE.
…Both Bid and Ask to be out-of-the-money.

Question #3:

To calculate the premium to OPEN the above Bear Put Spread order:

___A. Subtract $2.00 from $3.50
___B. Add $2.00 to $3.50
___C. Not now please

Question #4:

To calculate the profit of this Bear Put Spread order:
___A. I need a calculator
___B. Subtract $2.00 from $3.50
___C. Subtract the OPEN premium from the CLOSE premium

HOW TO CALCULATE BEAR PUT VERTICAL LOSS

MAXIMUM Loss (cannot lose more than this amount):

The initial amount you paid for the Premium
when opening the spread- $150.00

Answers:   #1: C — #2: B –#3: A — #4:  C

 

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