I have received a few questions recently about how to calculate the profit and losses on credit spread trades, so I wanted to do a post to cover the subject. We’ll take a look at a couple of trades from the IQ Trade Alert service and evaluate how they are doing so far. Hopefully this will help you to monitor these trades in your own accounts.
On September 23rd, I issued 2 Trade Alerts – An OIH Bull Put Spread at 75-85 and an RUT Iron Condor at 500-510 and 745-755. You can find the details attached below.
Firstly, let’s take a look at the OIH Bull Put Spread. You can see that I sold the 85 puts for 0.86 and bought the 75 puts for 0.28. This gave me a net credit price of 0.58, with 8 contracts traded I received $464 into my account. When I entered the trade I placed it as a limit order with a price of 0.58 (see screenshot below), keep in mind this order was placed with Interactive Brokers, so your order entry screen may look slightly different.
To now work out the Profit and loss on the open position, I take the mid-point of the current bid/ask spread. The 75 put is trading with a 0.06 bid and 0.40 ask with a mid-point of 0.23. The 85 put is trading at 0.35 and 0.51 with a mid-point of 0.43. The net price of the spread is 0.20. so my unrealized profit is (0.58 – 0.20) * 8 * 100 = $304
If I were to close this position now, I would have to pay 0.20 per contract or $160 (buy 8 contracts to close 85 put at 0.43 sell 8 contracts to close 75 put at 0.23). Therefore my unrealized profit on the position is $304, calculated as $464 minus $160. If I closed the trade today, I would enter the trade as shown below:
The RUT trade I entered in my private account was at slightly different strikes than the Trade Alert, but the concept is the same. I sold the 735-745 Bear Call Spread for a net credit of 0.90 and also sold the 490-500 Bull Put Spread for a net credit of 0.50. I traded 10 contracts for each side of the Iron Condor and therefore received $900 for the Bear Call Spread and $500, so in total I received $1400 into my account.
As you can see from the screen shot below, the Bear Call Spread is trading at 0.30 or $300 for 10 contracts, and the Bull Put Spread is trading at 0.05 or $50. In total it would cost me $350 to buy back the Iron Condor so my unrealized profit is $1,050.
I hope that helps you understand how to track these types of trades, as I know it can be a little confusing for beginners. Entering the trades can also cause newbies some issues, so if you have any questions at all, please leave them in the comments section below. One thing to keep in mind is that when actually closing the spread trades, you may not be able to get the exact mid-point of the bid/ask spread, as the market makers may try and make you pay a few cents more.
Click Here to download the excel file that I used to calculate these details in case you may find that useful.
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THE VIDEOS BELOW SHOW INSTRUCTIONS ON HOW TO ENTER CREDIT SPREADS TRADE IN BOTH OPTIONSHOUSE AND INTERACTIVE BROKERS