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Because the investor does not believe the share price will go much higher, they are taking advantage of the difference in premiums on both call options since they expect them to be worthless at expiration. If, as the investor expects, the share price of AAPL falls, they keep the entire premium from the vertical credit spread. In fact, so long as shares in AAPL remain below 170 at expiration, the investor keeps the whole $225.
The investor will face rising losses penny-for-penny above this point in the event the share price continues to rise. The distance between the higher and lower strike prices is $10, and since each option contract represents 100 shares, that’s worth $1,000.
The vertical credit spread is a commonly used strategy with option traders who expect prices to stall or even fall over the lifetime of the option contract.
Hi, great lesson! Perhaps you can make a similar lesson on debit spreads. Or is there a specific reason for why only touch upon the topic of a vertical credit spread in the beginners lessons?
Hello Daphne, thank you for reaching out. Remaining spreads are covered within the Advanced Options Strategies course from OCC here:
https://www.interactivebrokers.com/campus/trading-course/advanced-option-strategies/
We hope this helps!
Hello, if I open a position in IBKR mobile as a bull put spread, and I see the market starts moving against my position, can I close only the short leg (instead of the whole position) if I believe the price will continue dropping, so I kill the highest exposure, but leave the opportunity for the long put to produce larger gains before expiry? I understand that by doing this I risk incurring bigger losses if the price does eventually not cross the put strike and it expires worthless
Thx!
Hello Juan, thank you for reaching out. Please note that IBKR does not provide investment advice.
Hi, thanks for this study note. On TWS, setting a bull put spread (sell a put, buy a put at a lower strike) in the strategy builder is considered as a buy, and more over it is very disturbing to notice the credit value highligted in green is considered a negative value ! I have then three questions about this :
– is the CPS strategy a real buy or a real sell ?
– when negotiating the “negative” premium in order to increase it, before transmitting the CPS, is it better to increase or to decrease the “negative” premium value ?
– and when it comes to exit the CPS, do we execute a buy or a sell order ?
Thanks a lot for yours answers.
Hello, thank you for reaching out and we apologize for the delayed response.
It is showing as a negative value because the credit is going to the trader but that is why we mark it clearly with a green “c” in the Order Confirmation Window for how the same spread price displays can differ depending how it’s entered.
If you sell a CPS or Bull Put Spread the buyer will receive a credit and the seller will pay a premium.
If you buy a Bear Put Spread (which is the same as selling a Bull Put Spread) the buyer will pay a premium and the seller will receive a premium.
Regardless of whether you use a combination selector in Order Entry compared to selling the Bear Put and receiving a credit, TWS will price the orders according to how they are classified.
We hope this helps.
Hi, Why do options prices have positive and negative values? When is it positive or negative for buying and selling options?
Thank you for your question, Cai. Some option prices/strategies are negative because the credit is going to the trader. We mark it clearly with a green “c” in the Order Confirmation Window for how the same spread price displays can differ depending how it’s entered. We hope this information is helpful!
Hi, I want to know how to put a stop loss order on a credit spread or any spread. Last night I had a bull put spread on the QQQ’s and the market dropped through the spread. So I am now in debit quite a lot. How do I add a stop loss order both when writing the spread and maybe later if I have not added the stop loss order. Thanks
Hello, thank you for reaching out. Please view this FAQ for instructions to place a stop loss order in TWS: https://www.ibkr.com/faq?id=35807564
Also, you can review our available Order Types on our webpage: https://spr.ly/IBKR_OrdersCampus
We hope this helps!
How to set up stop loss and profit taker at the same time in vertical spread positions? Thanks
Hello, thank you for reaching out. To set up stop loss and profit taker orders simultaneously for a vertical spread position in Interactive Brokers (IBKR), you can use the Bracket Order feature:
When creating your vertical spread order in the Order Ticket, select “Attach/Bracket Order” at the bottom.
Choose “Bracket” to attach both a Stop Loss and Profit Taker order to the parent order.
Please view our webpage for more information: https://www.interactivebrokers.com/en/trading/orders/bracket.php
We hope this helps!
How to deal with that if position is already open?
Hello, while putting in a bull put spread for an ETF which has a max loss of 90, my order was not accepted because IBKR requires cash collateral equivalent to 100 of the ETF (45000). If the max loss is 90, why is such a large cash collateral necessary for a bull put?
Hello, thank you for reaching out. Please view this FAQ for more information on the collateral requirement for a cash-secured put: https://www.ibkr.com/faq?id=30125888
If you are experiencing a time-sensitive trading issue, please contact Client Services: http://spr.ly/IBKR_ClientServicesCampus
How do I set just a Stop Loss on an existing Bull Put Spread? I’m confused over whether I should be setting it as a Limit or Stop order since it’s dealing with negatives. Do I set it up as a Stop order, as I get the feeling setting at Limit will trigger and complete the trade instead of acting as a stop.
Thank you for reaching out. Please review our Order Types on our webpage:
https://spr.ly/IBKR_OrdersCampus
Hello there, if my spread finishes on the market lets say SPX – my bought put and sold put 5 points each other on the market, IBKR will charge me the difference or just for sold one? What I mean is – do I have to close it or IBKR will settled at the end both legs?
What level is need for credit spreads and wheel?
Hello, thank you for reaching out. To view what types of options spreads you can trade in your account based on Trading Permission level, please review: https://www.interactivebrokers.com/faq?id=35810290
We hope this answers your question!