What is a Call Spread Calculator, Put Credit Spread Calculator, and Credit Spread Calculator?
There are various options spread calculators such as the call spread calculator, put credit spread calculator, credit spread calculator or debit spread calculator. But before we can understand the various calculators, let's first look at the general intent of an options calculator, and how it works.
An options calculator is an arithmetic algorithm that can be used to analyze options. Generally, option calculators are based on what is known as the Black Scholes model, although this does not always have to be the case, and variations may still be accurate.
Usually an options calculator would determine your profit and loss under various scenarios but some more advanced ones can show when the best time is to enter a trade by determining the implied volatility, and the options greeks, which are all symbolic of various forms of risk and possible profit associated with the option.
Many options spread calculators can be found online for free, on various reputable websites, for example, the options profit calculator
However, many traders prefer to set up their own options spread calculations specifically designed for their trading style and goals. This can be done through the use of complex, algorithmic software, but in most cases an Excel spreadsheet is sufficient.
But why would you want to use an options spread calculator, and what does all of this information tell you?
Options Spread Calculators in Practice
Most traders are aware of the fact that there is risk in all trades, and in options specifically. There is a limited time on an option before the expiry date, so you cannot always wait out a loss, even if the markets have already turned in the direction that you would like.
In order to mitigate loss, some options traders have devised a strategy known as an options straddle, and a similar strategy known as a strangle.
You can read about an inverted strangle here.
Essentially, traders buy a put and call option of different strike prices but the same expiration date. As the value of the stock, and thus the value of the option changes, they are able to compensate for loss in one with profit from the other. This means that there is a maximum profit that can be made, but also a maximum loss.
An options spread calculator would run all the numbers of the possible profit and loss at given strike prices and provide the information in an understandable format, allowing you to decide when it is that you need to enter a trade with both a call and a put option in order to achieve the desired results.
Options spread calculators can generally be split into two categories.
The Two Types of Spread Calculators
Debit Spread Calculators
The first category of options spread can be referred to as a debit spread. Because options are usually all or nothing, the maximum loss that would occur on a debit spread would be the cost of entering the spread. This is generally made up of the cost of the put and call options, and the transaction cost associated with buying or selling them.
Likewise, the maximum reward is usually the difference between the strike prices, minus the cost of entering the trade and the associated transaction costs.
Credit Spread Calculators
The other type is referred to as a credit spread. This spread is a little bit more complex as it involves a credit amount which may not be immediately debited from or to you. The potential reward is this credit amount minus all transaction costs.
This credit is usually achieved through shorting one of the options positions that you plan on holding, and using the credit that is given to you from that trade to buy the other position.
In order to better understand these two types of options spread calculators, let's look at an example of each.
Call Spread Calculator
The call spread calculator is probably the most popular options calculator, and for that reason it is very easy to find one that is available for free. As indicated by the image below, supplied by OptionsStrat, there is limited profit and loss that occurs if you use the call spread calculator, allowing you to manage your risk with ease, but also cutting possible profit.
The call spread calculator is specifically targeting a bullish debit trade. As the stock price, and thus the option price increases, profit would increase as illustrated above, and as the price decreases, the put strike that can be bought to offset loss would result in a maximum loss.
This is also helpful in that it indicates when a trade should be exited. Due to the nature of maximum profit and loss, once the maximum profit has been reached, there is no point in staying in the trade and both the call and put can be exited.
The call spread calculator is targeted specifically at a bullish trade but the opposite would be a put spread calculator, which can also be found online with relative ease.
Put Credit Spread Calculator
The put credit spread calculator, also known as the bull put spread calculator, is also a bullish spread calculator. The name put credit spread calculator may lead to some confusion, but ultimately it involves shorting a put of a higher strike price and buying a put of a smaller strike price which means that the more the price of the underlying stock increases, the more profit is made.
The vertical spread looks very similar to that of the call spread calculator, with there being a maximum loss and a maximum profit, but the difference is that this is a credit spread scenario instead of a debit spread scenario.
Because you short the options, you are selling them, gaining the money in the form of credit which will often only be released to you once you have bought the options back again.
Some traders are wary of this, because there are theoretically endless losses that can be made when it comes to short trading. However, because the bought put acts as a buffer, the maximum loss and profit is retained in this situation.
For this reason, it is a good way for those who wish to dabble in trading shorts but who are not yet confident of their abilities and can prove to be a stepping stone for shorting other stocks and commodities.
Are Debit or Credit Spread Calculators Better?
The reality is that there is no way of saying if one spread calculator is better than the other. It all depends on who has set up the calculator and what they are taking into account.
Assuming that the calculators have been set up with equal accuracy, taking into account equal risk factors, then both are equally fine to use.
The best spread calculator will depend entirely on what your trading style is and what you are comfortable with. Both will tell you exactly how much of each strike price to buy or sell, and greeks associated with the transaction.
If you have large quantities of capital available to you, then either option would work for you. For the debit spread you might be required to put up large amounts of money up front in order to buy the options or need a margin account, but you will make back large amounts in profit as well.
If you do not have large amounts of capital to put up, then it might be better to look at a credit spread situation, simply because the money from the short of the first option will allow you to purchase the second option.
In cases like this, your available capital will only have to cover the maximum loss, and that can be easily determined with the use of the credit spread calculator.
Risk Management and Options Spread Calculators
Options spread calculators that have been set up well are ideal for risk management. If you know what your maximum risk is when entering a trade and you are more than willing to lose that money, then you are managing your money well.
Because this is something that newer traders tend to struggle with, the use of spreads is highly recommended. If a mistake is made, then there is very little that can go wrong beyond the maximum loss, as opposed to the limitless loss possible in other situations.
Making use of options spread calculators also means that the human error component of calculating risk is removed which can also be very prevalent when it comes to newer traders, or traders that place multiple orders in short periods of time.
Finally, this removes a lot of emotion from the decision making process. Instead of entering the trade in the spur of the moment, further analyses of the trade is required.
Regardless of whether you will place a trade based solely on the information given to you by the option spread calculator, more information is always helpful to a trader, especially regarding risk management. For this reason, it might be worthwhile looking at an options spread calculator when considering a trade.
Although we have looked only at options spread calculators, the same principles of minimizing loss by placing two trades that would oppose one another can also be applied to stocks and commodities, allowing you to minimize risk.
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