Date: June 2012: Option Credit Spread Calculator

   

Options Spread Calculator

Option Spreads are combination trades where two positions are initiated to form the "spread". Option Spreads use the same underlying stock and expiration month, but have different strike prices. Spreads can be either a Debit Spread or Credit Spread. Use the option spread calculator to determine your break even point for a bull put spread or bear call spread.

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A Debit Spread is used to buy high price stocks that would be otherwise too expensive. When placing a debit spread money comes out of your brokerage account to place the trade but much less than if you bought the option naked. Credit Spreads allow you to sell options with limited risk. In this type of trade, you collect money into your account from option premium. You get to keep the premium if the option expires out of the money. When placing a Credit Spread money is credited to your brokerage account; however money will be held as margin that you will not be allowed to trade to cover the possibility of a losing trade. Use the spread calculator below to see how spread trades work.

Options trading involves significant risks, but trading spreads allow for risks to be limited. A debit spread predefines maximum risk and can make expensive stocks that would be otherwise too expensive affordable. For example as of this writing, Google's at the money call options for the front month will set you back about $2700 for the 440 calls. A 440/450 front month bull put debit spread will cost just $490. This same trade could be done with a bull put credit spread for a credit of approximately $500. Options will ultimately reduce your risk by requiring less capital to put on trades as compared to buying stocks. This allows for the control of more stocks which will help avoid an earnings surprise or event risk associated with stock.