To figure the return on a spread, let’s take a look at an actual trade. In the July cycle, we did a 130-125 Bull Put Spread on AutoZone Inc. (AZO).

First, we need to find out how much we have at risk in this spread. For a detailed explanation of how this amount is figured, you will want to read “Figure Risk Reward of Spread” under “Account Requirements For Trading.”

It is true that credit spreads in general will have a negative risk to reward ratio. Instead of focusing on the risk/reward of trades, we look for high probability spreads. This allows us to have a track record of highly profitable trades month after month. The key is to keep our losses small and manageable and allow our accounts to grow.

In this trade, we are risking $8,900.00 to make a possible $1,100.00 profit. Based on this, we would have a 12.36% return on our money at risk. Not bad for one month’s work.

To enter this spread, your broker might require you to have $10,000 in your account for margin purposes (if you are trading the same number of contracts as our Track Record). If this is the case, then your return on the funds tied up in margin would be 11.00%. This is still not a bad return for one options cycle.

You can find more information on “Figuring Margin and Account Maintenance” under “Account Requirements For Trading.”

In this trade, the AZO options expired worthless and we kept the $1,100.00 credit that we received when we entered the spread.