Hello,
I have a question about a Bull Credit Spread. I am quite new to options but understand the basics with this spread but there are 2 things I really must sort out that I don't exactly understand.
I have seen this example on a video for a bull credit spread and have 2 questions.
Question 1: Does 10 contracts mean that we sell 5 contracts on $36 and buy 5 contracts on $35?
Question 2: This is the question I really must sort out and understand. It is how MAXIMUM RISK is calculated.
I understand the calculation that we take the Absolute value for the difference of the strike prices which is $1.00 and then multiply it with 1000 shares which is 10 contracts and that is equal to: $1000.
But here is anyway something that is not clear to me how it can be that. Aren't the strike prices themselves irrelavant because we bought 5 contracts of each where we should look at what the ACTUAL option did cost like:
$0.95 * 500 shares = $475
$0.80 * 500 shares = $400
Total: $875
So shouldn't the Maximum risk be $875?
It is somewhere here I don't really get it all, I beleive I need some real true scenario example why it is exactly 1000$?
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Bull Credit Spread Example:
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Sell to open the $36 Put at the Bid price
Sell at: $0.95
Buy to open the $35 Put at the Ask Price
Buy at: $0.80
CREDIT:
0.95 - 0.80 = $0.15
PREMIUM:
10 contracts = 1000 shares
1000 shares x $0.15 = $150 - commissions
MAXIMUM RISK
36-35 = $1.00 x 1000 shares = $1000
I have a question about a Bull Credit Spread. I am quite new to options but understand the basics with this spread but there are 2 things I really must sort out that I don't exactly understand.
I have seen this example on a video for a bull credit spread and have 2 questions.
Question 1: Does 10 contracts mean that we sell 5 contracts on $36 and buy 5 contracts on $35?
Question 2: This is the question I really must sort out and understand. It is how MAXIMUM RISK is calculated.
I understand the calculation that we take the Absolute value for the difference of the strike prices which is $1.00 and then multiply it with 1000 shares which is 10 contracts and that is equal to: $1000.
But here is anyway something that is not clear to me how it can be that. Aren't the strike prices themselves irrelavant because we bought 5 contracts of each where we should look at what the ACTUAL option did cost like:
$0.95 * 500 shares = $475
$0.80 * 500 shares = $400
Total: $875
So shouldn't the Maximum risk be $875?
It is somewhere here I don't really get it all, I beleive I need some real true scenario example why it is exactly 1000$?
----------------------------------------------------------------------------
Bull Credit Spread Example:
----------------------------------------------------------------------------
Sell to open the $36 Put at the Bid price
Sell at: $0.95
Buy to open the $35 Put at the Ask Price
Buy at: $0.80
CREDIT:
0.95 - 0.80 = $0.15
PREMIUM:
10 contracts = 1000 shares
1000 shares x $0.15 = $150 - commissions
MAXIMUM RISK
36-35 = $1.00 x 1000 shares = $1000
Bull Credit Spread maximum risk question
