Credit Spread Options Strategy
David, mentor at SJ Options, is talking about the Credit Spread in the excerpt from a live class in our mentoring program.
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…spread or one of our ratio tag trades. We want to understand what the graph is telling us. The white line is the day by day graph, the current state of our trade and the red line, the solid red line is our expiration bar.
The way I like to look at this is I put my pointer over here at our, what we’ll call the danger zone and then look at this at expiration, this number, minus 895. That’s going to be the same as the bind power effect over here. That’s what they’re putting on hold so to speak. That’s our max risk and then our max gain, we just put it at our current price here and then we look down at the bottom. Sure enough, it says 105 just like we calculated from the add simulated trade page. When I look at this I tell myself I’m risking $895 to make $105. I’ll say that again. I’m risking more or less 900 to make 100. You could do a simple calculation. I’ll do the specific one here. I know it’s kind of 9 by 1 but if you just do your maximum profit which is $105 and then you divide it by your risk, which is 895 you can get your, kind of, rate of return. I’ll get the pointer out here and I’ll do that.
I know a lot of folks will like to do that. It’s usually a pretty decent number but when you’re talking about these traditional credit spreads, you don’t always--- you don’t win constantly. A lot of the newsletters will say something to the effect of gain. These trades make 20% per month. If you did that every month, you wouldn’t have to sell a newsletter anymore. You just do the trades. You put your max profit over your max risk and that will give you your percentage return.