Trade Architect Platform - Interpret Spreads

[CostaKapo]

If someone could take a look at this chart and help me out it would be greatly appreciated. I have highlighted a couple areas that I am hoping to get person to person clarification on. I know the investopedia definition of Delta, and Theta as it pertains to options, and I get the concepts. However I look at this image and I try to understand it within the context of what I am looking to do.

For this Bear Call Spread I am using this Fridays expiration. (Friday October 24th 2014)

Netflix is the underlying. Buying the 385 Call selling the 382.5 call. 10 contracts will get 200$ premium while risking 2300 max loss.

Could someone look at this and tell me what they see and think when they look at this particular spread.

Thanks in advance, it will be a huge help to get a human explanation.

EDIT: For purposes of helping me, let me establish where I stand when I look at this potential spread position.

We have the short side being 382.5 so if on Fridays close the underlying is under 382.5 I will get 100% of premium

The 382.5 currently has a 6.26% probability of expiring in the money and the 385 call 4.17%

 

[ACstudio]

If someone could take a look at this chart and help me out it would be greatly appreciated. I have highlighted a couple areas that I am hoping to get person to person clarification on. I know the investopedia definition of Delta, and Theta as it pertains to options, and I get the concepts. However I look at this image and I try to understand it within the context of what I am looking to do.

For this Bear Call Spread I am using this Fridays expiration. (Friday October 24th 2014)

Netflix is the underlying. Buying the 385 Call selling the 382.5 call. 10 contracts will get 200$ premium while risking 2300 max loss.

Could someone look at this and tell me what they see and think when they look at this particular spread.

Thanks in advance, it will be a huge help to get a human explanation.

EDIT: For purposes of helping me, let me establish where I stand when I look at this potential spread position.

We have the short side being 382.5 so if on Fridays close the underlying is under 382.5 I will get 100% of premium

The 382.5 currently has a 6.26% probability of expiring in the money and the 385 call 4.17%

K...lemme see if i've got this right. You sold a 2.50$ wide credit spread where you are short the 382.50. It looks like the credit was .51 and the debit was .41 for net credit of .10$. (are you sure you collected .20x10 for 200$ credit?)

Either way....your max loss is the width of the spread (2.50) minus the credit received. So if you collected .20 your risk is 2.30 or if you collected .10 then your risk is 2.40)

The Delta of this position isn't really that important. But the way it reads is that you are long .07 deltas and short .09 for net -.02 which is -2 deltas per lot. -2 Deltas is the synthetic equivalent of being short 2 shares of stock. So there are a number of ways you could hedge this position. It's a little late at this point ...weeklies don't give you much time to make adjustments and also when you do a spread you are defining the risk from the beginning and statistically it doesn't work well to manage losers in a risk defined strategy. It's better to manage winners and give losers more time to come back in your favor.

However knowing that you are carrying -2 deltas x 10 = -20 deltas you could turn it into an iron condor by selling put spreads at 2-4 positive deltas or more. The premium collected there will move your breakeven a little further out. So right now your breakeven is equal to the short strike plus the credit received. If you collect another .30x10 that will synthetically move you breakeven 30 cents further out. Selling up to 10 put spreads will not cost anything in buying power as the risk is defined by only one side of the trade by the broker.

I realize you are restrained by number of trades but I would hate to see this go against you. If you are not restrained by buying power limitations you could also sell a naked put out at -10 to -20 deltas taking a lot or all of the risk off the table as selling a put gives you positive deltas. And that would only be 1 transaction.

The current probability of this expiring worthless is the inverse of your short strike delta (or very close). So if your short strike is 9 deltas the probability of it expiring worthless on Fri is around 91% give or take a few.

To calculate the expected move of the underlying for that expiration simply add up the bid price of the first in the money and the first out of the money calls and add that to the sum of the bid price of the same on the put side....and divide by two. That's a quick and easy way to roughly guess what the expected one standard deviation move is by expiration for that underlying.

The risk/reward???? not exactly sure but if I had to guess I would say it might be a calculation of what you can expect to make for every 1$ at risk at this point...maybe. not sure.

The Theta numbers are showing you how much extrinsic value is expected to come out of the options for every day. So as you can see your short strike is decaying at a faster rate than your long strike. Which is what you can expect when you sell premium such as with a credit spread. You want positive theta decay in the end. So you are making .264$ per day on the short strike and losing .211 in the long strike. So your net is .053 per day per contract (or times 100 per lot) in positive Theta decay. So that's a good thing for premium sellers. One strategy people use for this number is to manage their portfolio to be in line with collecting around .5-1% positive theta decay per day vs their portfolio. Knowing that the greatest amount and most rapid Theta decay occurs between 45-10 days until expiration they will stay in that area as much as possible.

It looks like the expected move for this expiration is less than 8$ so the odds are in your favor. But with the kind of market moves we have been seeing and the fact that NFLX is way oversold right now and beat down it could bounce....so keep an eye on it. If this even looks like it might expire near your short strike on FRI it's better to take it off as if it expires between the strikes on Sat you will be assigned the balance of the shares and wake up Sat or Sun with a large position in NFLX stock. If it happens (and it eventually will) don't panic....If you were exercised on or before expiration just exercise your long options....if you get assigned a balance of shares just sell them at the first opportunity (unless you can and want to carry them). But if you don't have the capital to cover the position or don't want to...they will always let you close it out and all your numbers will snap back into place.

I hope that helps....let me know if any of it doesn't make sense.