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Options Trading Math Strategies

The document outlines various options trading strategies, including Bull Put Spread, Bear Call Spread, and Short Iron Butterfly Spread, detailing their net credits, maximum profits, and losses based on the underlying stock's performance. It also discusses the adjustment of implied volatility for different trading periods and provides a formula for calculating exit points for option premiums. Additionally, it emphasizes the importance of considering trading days and potential stock volatility in options trading decisions.

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Douglas Barber
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340 views2 pages

Options Trading Math Strategies

The document outlines various options trading strategies, including Bull Put Spread, Bear Call Spread, and Short Iron Butterfly Spread, detailing their net credits, maximum profits, and losses based on the underlying stock's performance. It also discusses the adjustment of implied volatility for different trading periods and provides a formula for calculating exit points for option premiums. Additionally, it emphasizes the importance of considering trading days and potential stock volatility in options trading decisions.

Uploaded by

Douglas Barber
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Options Math:

Bull Put Spread (Short ITM Put – Long OTM Put):


Net Credit = ITM Premium - OTM Premium
#1 The Underlying Closes Higher Than Your ITM Put:

Maximum Profit = Short Put Premium - Long Put Premium

#2 The Underlying Doesn’t Move:

Maximum Loss = Stock Price - Short Put Strike + (Short Put Premium - Long Put Premium)

#3 The Underlying Closes Below Your OTM Put:

Maximum Loss = Long Put Strike - Short Put Strike + (Short Put Premium - Long Put Premium)

Bear Call Spread (Long OTM Call – Short ITM Call):


Net Credit = ITM Call Premium - OTM Call Premium

#1 The Underlying Closes Higher Than Your ITM Call:

Maximum Loss = Short Call Strike - Long Call Strike + (ITM Call Premium – OTM Call Premium)

#2 The Underlying Doesn’t Move:

Maximum Loss = Stock Price - Long Call Strike + (ITM Call Premium - OTM Call Premium)

#3 The Underlying Closes Below Your OTM Put:

Maximum Profit = ITM Call Premium - OTM Call Premium

Short Iron Butterfly Spread (Long OTM Call - Short ATM Call - Short ATM Put - Long OTM Put):
Net Credit = ATM Call Premium + ATM Put Premium - OTM Call Premium + OTM Put Premium

Maximum Loss = (Long Call - Long Put)/2 – Net Credit (The Distance Between the Strikes – Net Credit)

Upper B/E Limit = Short Put Strike + Net Credit

Lower B/E Limit = Short Call Strike – Net Credit

Call Option: (If Less Than 0, Then 0 – Premium for Max. Loss)
Maximum Profit = (Stock Price – Strike Price, >0) - Premium

Put Option: (If Less Than 0, Then 0 – Premium for Max. Loss)

Maximum Profit = (Strike Price – Stock Price, >0) – Premium

Expected Stock Volatility:


In practice, the IV of an option must be adjusted to represent the period of time desired.

The number traders use to represent the number of trading days per year is 256, because the square root is a
round number: 16. Especially useful for choosing strike prices of Condors, Butterflies, and Calendars.
The formula is __IV__ = 1 day expected α
____
√256
Then multiply the one-day volatility by the square root of the number of trading days in your trade.
________________________________
_ IV__ x √Number of Trading Days Til Expiration x Underlying Price
____
√256

Based on the number of trading days it can be estimated that there is a 68 percent chance of the stock closing
between the + or - the current stock price in the number of trading days calculated.

Compute Your Option Premium Exit Point:

If you want to Exit your trade when the Option Premium reaches a Price Point of $1.10, the formula is.
Price Point - Ask Price = Δ Option Premium (- Ask Price if Long, - Bid Price if Short)
Δ Option Premium ÷ [ Delta + (Gamma/2)] = Δ Stock Price
This will give you a Stock Price that approximately correlates with a $1.10 Option Premium. Based on how
much you’re willing to pay to Exit your trade. This doesn’t take into account any commissions, fees or other
charges that may apply.

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