Options Case Study - A Comparison of 1, 2, 3, 4, 5, 7 and 10 point

wide Credit Spreads Using Examples on The SPY, an ETF that

Tracks the S&P 500 Index
This case study analyzes and compares 1, 2, 3, 4, 5, 7 and 10 point wide credit spreads on the SPY.
The SPY is an ETF that tracks at 1/10th the value of the S&P 500 index. We make the case that the
2 point credit spread usually provides the best returns if we don't anticipate the need to make a lot
of adjustments during the month. However, if we are early in the cycle (a full cycle is typically 25
to 40 days) and if we believe we'll need more flexibility to make adjustments during the month, we'll
then use the 3 point credit spread.
Here are the assumptions used when making our calculations:
1) Commission = $1/options contract or $2/spread.

(we show additional commission rates in the

chart below)
2) $5000 of cash is available to open the spreads
3) The trade stays out-of-the-money (OTM) and profitable, and we let the spread expire worthless,
which is 100% profitable for us, the seller. Thus, we only pay commission to open the spreads and
we call this "one-way" commissions. (in contrast to round-trip commissions where we pay to open
and close the trades)
4) All spreads have 31 days until expiration
5) We simplify the number of spreads that we can open by dividing the available $5000 of cash by
the required maintenance.
Below is the SPY Aug 89/90 bull put spread which has the following characteristics:
1) It's a 1 point spread (i.e. 1 point between the sell leg and the buy leg)
2) Required maintenance by the broker is $100 per spread (1 point spread * $100/point)
3) 50 spreads can be opened ($5000/$100 of required maintenance per spread)
4) Premium collected is $15 credit x 50 spreads = $750

5) Risk capital is $5000 in maintenance - $750 of premium collected = $4250

6) One-way commission at $1/contract is 50 spreads x $2/spread = $100.
7) Commission as a % of premium collected is 100/750 = 13.3%
8)

ROI

after

one-way

commission

is

(750-100)/4250

Below is the SPY Aug 88/90 bull put spread which has the following characteristics:
1) It's a 2 point spread (i.e. 2 points between the sell leg and the buy leg)
2) Required maintenance by the broker is $200 per spread (2 point spread * $100/point)
3) 25 spreads can be opened ($5000/$200 required maintenance per spread)
4) Premium collected is $25 credit x 25 spreads = $625
5) Risk capital is $5000 in maintenance - $625 of premium collected = $4375

15.3%

6) One-way commission at $1/contract is 25 spreads x $2/spread = $50.

7) One-way Commission as a % of premium collected is 50/625 = 8%
8) Return after one-way commission is (625-50)/4375 = 13.1%

Below is the SPY Aug 87/90 bull put spread which has the following characteristics:
1) It's a 3 point spread
2) Required maintenance by the broker is $300 per spread
3) 16 spreads can be opened ($5000/$300)
4) Premium collected is $35 credit x 16 spreads = $560
5) Risk capital is $5000 in maintenance - $560 of premium collected = $4440
6) One-way commission is 16 spreads x $2/spread = $32.

7) One-way commission as a % of premium collected is 32/560 = 5.7%

8) Return after one-way commission is (560 - 32)/4440 = 11.8%

Below is the SPY Aug 86/90 bull put spread which has the following characteristics:
1) It's a 4 point spread
2) Required maintenance by the broker is $400 per spread
3) 12 spreads can be opened ($5000/$400)
4) Premium collected is $44 credit x 12 spreads = $528
5) Risk capital is $5000 in maintenance - $528 of premium collected = $4472
6) One-way commission is 12 spreads x $2/spread = $24.
7) One-way commission as a % of premium collected is 24/528 = 4.5%

8)

Return

after

one-way

commission

is

(528

24)/4472

Below is the SPY Aug 85/90 bull put spread with the following characteristics:
1) It's a 5 point spread
2) Required maintenance by the broker is $500 per spread
3) 10 spreads can be opened
4) Premium collected is $50 credit x 10 spreads = $500
5) Risk capital is $5000 in maintenance - $500 of premium collected = $4500
6) One-way commission is 10 spreads x $2/spread = $20
7) One-way commission as a % of premium collected is 20/500 = 4%
8) Return after one-way commission is (500 - 20)/4500 = 10.6%

11.2%

Below is the SPY Aug 83/90 bull put spread with the following characteristics:
1) It's a 7 point spread
2) Required maintenance by the broker is $700 per spread
3) 7 spreads can be opened ($5000/$700 required maintenance per spread)
4) Premium collected is $58 credit x 7 spreads = $406
5) Risk capital is $5000 in maintenance - $406 of premium collected = $4594
6) One-way commission is 7 spreads x $2/spread = $14
7) One-way commission as a % of premium collected is 14/406 = 3.4%
8) Return after commission is (406 - 14)/4594 = 8.5%

Below is the SPY Aug 80/90 bull put spread with the following characteristics:
1) It's a 10 point spread
2) Required maintenance by the broker is $1000 per spread
3) 5 spreads can be opened
4) Premium collected is $65 credit x 5 spreads = $325
5) Risk capital is $5000 in maintenance - $325 of premium collected = $4675
6) One-way commission is 5 spreads x $2/spread = $10
7) One-way commission as a % of premium collected is 10/325 = 3%
8) Return after one-way commission is (325 - 10)/4675 = 6.7%

Below is a grid that summarizes our analysis - if you would like access to this spreadsheet, please
contact us at support@monthlycashthruoptions and we'll forward it to you.

credit
# of credit
spread
spreads that
point
can
be
width (diff.opened withReq'd
between "cashavailtoMaint
buy & selltrade"
Per
legs)
variable
spread

Total
Credit
premiumTotalRisk
premium collectedCapital
per spreadwhen (req.
ROI
(from
opening maint. with
risk/rewardthe
less total1way
charts
credit premium Comm
above)
spreads collected) Rate1

ROI
with
1way
Comm
Rate2

ROI
with
1way
Comm
Rate3

ROI ROI
with with
ROI withRound Round
1way trip trip
Comm Comm Comm
Rate4 Rate1 Rate2

ROI
with
Round
trip
Comm
Rate3

50

$100

$15

$750

$4,250

16.0%

15.3%

14.1%

17.4%

14.4% 12.9%

10.6% 17.2%

25

$200

$25

$625

$4,375

13.5%

13.1%

12.6%

14.1%

12.7% 12.0%

10.9% 13.8%

17

$300

$35

$583

$4,417

12.7%

12.5%

12.1%

13.0%

12.2% 11.7%

10.9% 12.8%

13

$400

$44

$550

$4,450

12.0%

11.8%

11.5%

12.1%

11.6% 11.2%

10.7% 11.9%

ROI
with
Round
trip
Comm
Rate4

10

$500

$50

$500

$4,500

10.8%

10.7%

10.4%

10.9%

10.5% 10.2%

9.8%

10.7%

$700

$58

$414

$4,586

8.8%

8.7%

8.6%

8.8%

8.6%

8.4%

8.1%

8.6%

10

$1,000

$65

$325

$4,675

6.8%

6.7%

6.6%

6.7%

6.7%

6.5%

6.3%

6.5%

credit
spread
point
width (diff.
between
1way 1way
buy & sell1way CommComm Comm
legs)
Rate1
Rate2 Rate3

Round
1way trip
Comm Comm
Rate4 Rate1

Round
trip
Comm
Rate2

Round
trip
Comm
Rate3

Round
trip
Comm
Rate4

$70

$100

$150

$10

$140

$200

$300

$20

$35

$50

$75

$10

$70

$100

$150

$20

$23

$33

$50

$10

$47

$67

$100

$20

$18

$25

$38

$10

$35

$50

$75

$20

$14

$20

$30

$10

$28

$40

$60

$20

$10

$14

$21

$10

$20

$29

$43

$20

10

$7

$10

$15

$10

$14

$20

$30

$20

credit
Comm Comm Comm Comm
spread
Comm
Comm Comm
Comm as % ofas % ofas % ofas % of
point
as % ofas % ofas % ofas % ofcollected collected collected collected
width (diff.collected
collectedcollected collectedpremium premium premium premium
between premium
premiumpremium premiumround round round round
buy & sell1way
1way 1way
1way trip
trip
trip
trip
legs)
Rate1
Rate2 Rate3
Rate4 Rate1
Rate2 Rate3 Rate3

9.3%

13.3%

20.0%

1.3%

18.7%

26.7%

40.0%

2.7%

5.6%

8.0%

12.0%

1.6%

11.2%

16.0%

24.0%

3.2%

4.0%

5.7%

8.6%

1.7%

8.0%

11.4%

17.1%

3.4%

3.2%

4.5%

6.8%

1.8%

6.4%

9.1%

13.6%

3.6%

2.8%

4.0%

6.0%

2.0%

5.6%

8.0%

12.0%

4.0%

2.4%

3.4%

5.2%

2.4%

4.8%

6.9%

10.3%

4.8%

10

2.2%

3.1%

4.6%

3.1%

4.3%

6.2%

9.2%

6.2%

Variables

Cashavailablefortrade

$5,000

CommissionRate1percontract

$0.70

CommissionRate2percontract

$1.00

CommissionRate3percontract

$1.50

CommissionRate4(flatrate)

$10.00

Conclusion:

From the analysis above, the 2 point wide credit spread provides the highest return,

but commissions can be a problem if one pays more than $1/option contract. When trading 2 point
wide credit spreads it's best to find the lowest cost broker. When we are early in the cycle and feel

that we might need more flexibility to make adjustments during the month, the 3 point spread is
optimum.

When we say that we need "flexibility" to make adjustments, we mean that when the

spread gets under pressure from a fast moving underlying index (the SPY in this case) we implement
the "stay ahead of the wave" strategy by "clicking-up" or "clicking-down" our strike prices to move
further away from the underlying index and we open more spreads to bring in more premium. If we
use the 3 point spread we have the flexibility to "click-UP/DOWN" 2 times if needed.

For example,

let's say we have a SPY 90/93 bull put spread and 10 days after we open this spread the SPY sellsoff putting our 90/93 bull put spread under pressure. In this situation, we would not yet close-out
the SPY 90/93 spread but we would watch it closely, and in parallel we would "stay ahead of the
wave" and click-down a strike to the SPY 89/92 bull put spread (in the same month) and open some
to continue to bring in premium.

If we need to click-down again, we have the flexibility to click-

down one more time to the SPY 88/91 bull put spread to allow us to keep bringing in premium. If
we need to click down even further, we won't be able to open the SPY 87/90 bull put spread until we
close-out the original SPY 90/93 bull put spread because the 90 strike overlaps and will cancel each
other out; however, this is ok because if the underlying SPY is dropping this fast, and just by the
fact that we've already clicked down twice, we probably will need to close out the original SPY 90/93
anyway to cut our losses and to minimize any further downside. With this said, and especially for
bull put spreads, we would not engage in the "stay ahead of the wave" strategy unless the market
timing indicators were giving us the green light that the economy and the market are "healthy" and
therefore it's ok to keep clicking down and bringing in premium. For more on how we Market Time,
please go to WhyMarketTiming.htm. For more on the "staying ahead of the wave strategy", please
visit the Learning Center and read the entries "what if the market surges, how do we protect
ourselves"? and "what if the market crashes, how do we protect ourselves?".
About The Author
Brad Reinard is Editor-in-Chief of Monthly Cash Thru Options LLC, a leading index credit spread &
iron condor options advisory newsletter, which has the following track record:

92% 2009; 33%

2008; 63% 2007; 42% 2006; 50% 2005. For more information on the technical analysis that we
perform on the S&P 500 index, along with how-to-trade trading tips on iron condors and credit
spreads please visit www.monthlycashthruoptions.com or call Brad directly toll-free at 877-2487455. Monthly Cash Thru Options LLC is located in San Jose, California, the heart of Silicon Valley.