Option Spread Analysis

Bull & Bear Spreads Analysis

This analysis examines simultaneously buying and selling options of the same type (Calls or Puts) on the same underlying with the same expiration date. There are four spreads that fit this criteria; "Bull Put Credit Spreads", "Bear Put Debit Spreads", "Bull Call Debit Spreads", and "Bear Call Credit Spreads".

Bull Put Credit Spread (See term definition)

Bear Put Debit Spread (See term definition)

Bull Call Debit Spread (See term definition)

Bear Call Credit Spread (See term definition)

Analyzer assumptions:

Analyzer operation:

This program screens and analyzes option spreads.
  1. Historical data is retrieved on the underlying security and historical volatility is calculated.
  2. The option chain for the underlying is retrieved and the options in the chain are screened by their volume and their "safety margin".
  3. Options, which pass the screening criteria, are combined into spreads and analyzed.
  4. Analysis results are compared against filtering criteria.
  5. Results, which pass filtering criteria, are displayed.

Screening criteria:

Effective use of screening parameters will help conserve the user's allotted monthly transactions.

Percent safety margin:

This parameter specifies a series of safety margins separated by commas.
Example: 5,9,20
Safety margin 1 is 5%
Safety margin 2 is 9%
Safety margin 3 is 20%

The safety margin is the amount the price of the underlying stock may change in the unfavorable direction before the spread no longer pays off at maximum profit.

Each safety margin is applied to successive expiration periods. That is, safety margin 1 is used to screen the spreads with the nearest expiration date, safety margin 2 is used to screen the next nearest spread expiration date, etc.

Include options with the previous day's volume more than ___.

Checking the box for this parameter will activate the liquidity screen. Only options that have a previous day's volume greater than the specified amount will pass the screen.

Analysis parameters:

These parameters are used as input to the analysis.

Ticker Symbols:

Up to ten underlying stock or index ticker symbols may be entered for analysis. Use commas to separate ticker symbols. This field is not case sensitive.
Example: IBM,csco,qqq,LU

Risk neutral annual growth rate: (term definition) ( tutorial)

The annualized expected rate of investment growth. Because of the uncertainty involved in choosing this number, the analysis programs allow you to specify a range for it. The minimum value of the range is used for calculations that would show profit most strongly under bullish conditions. The maximum value of the range is used for calculations that would show profit most strongly under bearish conditions. This introduces a degree of conservatism (worst case analysis) into the result.

Number of contracts to be traded = ___.

This field is used to calculate brokerage fees on spread's net profitability and expected value. Brokerage fees often have a significant impact on spread profitability. (See Brokerage Fee Calculation)

Filtering criteria:

These parameters are used to filter the results of the analysis. Effective use of this parameter will make the analysis report more readable by excluding reporting of option data that is not of interest.

Include only spreads with maximum profit of more than __.

Checking the box for this parameter will activate the gross maximum profit filter. This value should be set to pass only spreads that would result in profits meaningfully higher than your per share brokerage fees. Example: If your fees are $.10/shr, you might require at least $0.25/shr gross profit. Note that even in this case, you are giving your broker 40% of your potential profit.

Include only spreads with annualized gross return of more than __%.

Checking the box for this parameter will activate the gross return on risk filter.

Include only spreads with expected values of more than __.

Checking the box for this parameter will activate the expected value filter. The impact of brokerage fees are included in the calculation of expected value. (See the "Expected Value" description in the site's education section.)

Include only spreads with annualized net returns of more than __%.

Checking the box for this parameter will activate the net return on risk filter. The net return is defined as the expected value divided by the amount risked.

Report description:

The analysis report consists of a section for each underlying security. The section header reports screening and filtering statistics.

The first column displays the underlying's symbol.

The "Last" column displays the underlying's last trade price.

The "Buy@Ask" column displays the option symbol (without .o suffix), strike price, and current Ask price of the long option of the spread. Example: INQJG(35)@0.05 means option INQJG.o has a strike price of $35 and has a current Ask price of $0.05.

The "Sell@Bid" column displays the option symbol (without .o suffix), strike price, and current Bid price of the short option of the spread. Example: INQJF(30)@0.55 means option INQJF.o has a strike price of $30 and has a current Bid price of $0.55.

The "Days" column displays the number of days remaining until spread option expiration.

The "Buy/Sell Volume" column displays the most recent session's volumes for the specified long and short options.
Example: 2,897/6,106
The long option's volume was 2,897 contracts.
The short option's volume was 6,106 contracts.

The "Safe" column displays the spread's safety margin.

The "Break Even" column displays the spread's Break-Even price.

The "Max Profit" column displays the maximum gross per share profit achievable by the spread.

The "Risk$" column displays the per share amount risked (maximum gross loss achievable) by the spread.

The "Annual MaxRtn" column displays the annualized maximum gross return on risk of the spread ((MaxProfit/Risk$)/(Days/365)).

The "Prob Profit" column displays the spread's Probability of Profit. (See the "Probability of Profit" description in the site's education section.)

The "Net ExpVal" column displays the spread's per share Expected Value, including the impact of brokerage fees. (See the "Expected Value" description in the site's education section.)

The "Annual NetRtn" column displays the spread's expected annualized return, including the impact of brokerage fees. This value is the annualized expected value divided by the amount risked.


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