Figure Risk Reward of Spread

Figuring the Reward on a spread is very easy. Let's take a look at a spread from July 2007. In this credit spread, we entered a Bull Put Spread on AutoZone Inc. We sold Puts at the 130 strike price and bought Puts at the 125 strike price.

Sold 10 contracts at 130 strike price (credit) $ 1.07
Bought 10 contracts at 125 strike price (debit) $ 0.52
Total Credit in Spread (credit minus debit) $ 0.55

Then we need to figure the total credit for the position.

Credit Per Share $ 0.55
Credit Per Contract (100 Shares in a Contract) $ 55.00
Total Credit Per Position (20 Contracts) $1,100.00

Now we need to figure the Risk in a spread. Similar to the Reward, this is also very simple to do. We just find the point difference in the spread and then subtract the credit that we receive in the position.

Point Difference in Spread (130 Strike Price Minus 125 Strike Price) $ 5.00
Minus Credit Received in Spread $ 0.55
Total Risk in Spread $ 4.45

Similar to the Reward, now we need to figure the total credit for the position.

Risk Per Share $ 4.45
Risk Per Contract (100 Shares in a Contract) $ 445.00
Total Risk Per Position (20 Contracts) $8,900.00

Now we can easily see the Risk versus the Reward in a Spread.

Risk in Spread $8,900.00
Reward in Spread $1,100.00

Everyone has heard that nearly 80% of options expire worthless. We love that figure because as option sellers, we want both the options that we bought and sold, to expire worthless on the third Friday of each month. On July 20th, this spread expired worthless and we made a profit of $1,100.00 in this trade.

Return To Our Strategy