Need help setting up a Bull Put (credit) spread

[Douglastax]

Noob here again. I signed up with this forum about 2 years ago, got sidetracked with a project, and here I am to continue...

I'm trying to setup a simple Bull Put (credit) spread.

For the sake of simplicity lets go with AAPL. The underlying is trading at about 108 today and lets setup for the May 6 2016 options about a month from now.
http://finance.yahoo.com/q/op?s=AAPL&date=1462492800

For more simplicity, lets say I'm selling the put at 118 and buying the call at 98. An equal 10pts each way.

[earadazo]

First...your best learning tool for this stuff is Tastytrade.com. The daily shows are archived and there are tons of archives to go through.

Second....The spread you described is not a bull put spread. If you sell a put and buy a call both are direction bets that the stock will go up and you have a lot of risk to the downside which will be reflected in the buying power reduction required for that position. By buying that deep in the money call and selling that deep in the money put all you have done is taken a long deep in the money call position and reduced your cost basis by the amount of extrinsic value you paid on the call. You see the put will not be profitable unless AAPL trades above 118 or makes a strong move in that direction. But current option implied volatility for that strike suggests that there is a 84% chance that will not happen. Anyway I could go on about why not to do that combination but I think it would be better to talk about what you are trying to do.

A bullish put spread or a put credit spread would be to sell an out of the money put and then buy a further out of the money put. You sell the expensive one and buy a cheap one (to hedge risk and reduce the amount of capital required) and net a credit and therefore the put spread is bullish. Don't bother selling deep in the money puts...there is less liquidity, you have less extrinsic value and the capital requirements are greater. Keep your spreads at or out of the money and you will do better.

Anyway to finally get to your question about the math. The bid/ask of each option is the spread of the price. The amount you will pay or receive will be somewhere in the middle called "mid-price". How much you give up trying to get filled depends a lot on liquidity and open interest. For a credit spread I usually start a few cents higher, give it a couple of seconds and do a cancel/replace and walk the price up a penny at a time until it reaches mid price...then I might let it sit a minute to see if it fills. I prefer to let the price come to me rather than just give up a couple of cents for a quick fill. When you are doing a spread you are dealing with 2 bid/ask spreads so it is important to stick to very liquid options so you can get in and out without much slippage.

[dshzpgga90]

Thanks. Wow did I mess that one up. A Bull Put spread is two *PUTS*... not a put & a call. Right there in my notes. And this...

A bullish put spread or a put credit spread would be to sell an out of the money put and then buy a further out of the money put.

I was under the impression that it's a put below the market price and a put above. Here's a do-over...

[elexanderPa]

Tastytrade is for watching the videos and learning. Especially new things like when to buy a spread vs when to sell a spread and what to look for in liquid underlyings.
If you want a graph, create an account in dough.com and use it's link to set up an account with TDA. Then you can use their software for Dough and Thinkorswim without putting any money in it. But you need to put the 2 trades through as a single spread...not 2 separate legs ...so there will be one mid price....if you have doubts where that is just start low and cancel/replace and walk it up until it fills.

To calculate your P/L for a put credit spread just subtract your credit received from your short strike....and that's your break even point. Your max profit is credit received. And max loss is the width of the spread minus credit received. Never let a spread that is trading at or near the money go into expiration...just close on the Thurs or Fri before expiration...until you can explain and fully understand why you would and wouldn't.

If your short strike gets assigned early...do not panic...simply exercise your long option and the position will flatten...unless you have the capital and want to hold the position.