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Credit Spread Profit Loss Calculation

 
     
 

 

On this page you will learn how to work out your profit when selling credit spreads. Although this is a little technical, the calculation is not hard - and you need to know it, so that you have an accurate, and not "pie-in-the-sky" view of your true profits.

 
     
 
 
     
 
     
 
 
     
 


 
     
 

When selling credit spreads, you are not directly investing money, but you do need to put up some margin so that you are covered in case your spread goes ITM. So, you do not calculate your profit from the ROI (Return on Investment), but on the ROM (Return on Margin).

Whenever you sell a credit spread, you are simultaneously buying two contracts in one trade: you buy one option and simultaneously sell another. Your broker will see this as one trade, which often has a basic fee, and then will charge per contract.

Example: TOS charges $9.95 per trade plus $1.50 per contract. So, selling a single vertical spread on XYZ would attract a commission of $9.95 + $1.50 +$1.50 = $12.95.
Selling 10 contracts would be charged: $9.95 + (20 x $1.50) = $39.95
For a butterfly or Iron Condor trade, you are trading four option contracts at one time. So:
Example: Sell a single condor spread on XYZ would attract commission of $9.95 + (4 x 1.50) = $15.95.
Selling 10 contracts would be charged: $9.95 + (40 x $1.50) = $69.95

What about Margin?
The margin required is defined as "Value of the difference between the strike prices of the vertical spread". This means that if you sell a single 330/340 vertical spread for XYZ (trading at $350), the difference between the strike prices is $10. This means that when you sell the spread, you will need a margin of $1,000. For 10 spread contracts, you will need a margin of $10,000.
If, on the other hand, you sell a 335/340 spread, you will need $500 margin for a single spread, or $5,000 for 10 spread contracts.

Profit calculation

Example:
Sell one vertical spread for XYZ @1.50. Margin requirement = $1,000
Total revenue = $150
Commission = $12.95
Therefore, net profit = $150 - $12.95 = $137.05
ROM = $137.05/$1000 x 100 = 13.7%

If you let the spread expire, then you only pay one fee. When you buy back the spread, and sell another, you pay fee for each transaction.

Example:
Sell 10 vertical spreads for XYZ @1.50. Margin requirement = $10,000
Total revenue = $1,500
Commission = $39.95
Therefore, net profit = $1,500 - $39.95 = $1460.05
ROM = $1460.05/$10,000 x 100 = 14.6%

 

See more on trading Credit Spreads:

See some live trade examples for Credit Spreads:

 

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