Wednesday I conducted a webinar for Interactive Brokers discussing ratio spreads.  During the presentation I was asked about initiating 1 x 2 and what expirations and strike combinations would result in a credit.  Another stipulation was that the trade would buy one at-the-money option and sell two out-of-the-money options.  I wasn’t asked for a call or put spread, so I did both with each expiration.  With so many moving parts to that question I responded that I would investigate and report back in this space.  I used pricing from November 15th on the close and option expirations for November 24th, December 1st, and December 29th.  I also let the asker of the question pick the markets and they chose SPX and CMG.  I’ll start with SPX.

SPX closed at 2564.62 on November 15th so the 2565’s are the at the money options.  I used the ask side of the final quote as the purchase price and the bid side as the selling price for the out of the money options.  Finally, I only did SPX trades that had a credit of at least 1.00. 

The SPX call spread using November 24th options involves buying the SPX Nov 24th 2565 Call for 14.80 and selling two of the SPX Nov 24th 2575 Calls at 8.50 for a net credit of 2.20.  The result is a maximum payoff of 12.20 on the close November 24th if the S&P 500 is up 0.36% finishing the day at 2575.00  Also, break-even on the upside at 0.88% higher at 2587.20. 

SPX 1

The SPX put spread using November 24th options involves buying the SPX Nov 24th 2565 Put for 14.60 and selling two of the SPX Nov 24th 2540 Puts at 8.00 each for a net credit of 1.40.  The result is a maximum profit 26.40 if the S&P 500 is down 1.00% and a downside break-even of -1.99% at 2513.60. 

SPX 2

The SPX call spread using December 1st options involves buying the SPX Dec 1st 2565 Call for 20.10 and selling two of the SPX Dec 1st 2580 Calls at 11.00 for a net credit of 1.90.  The result is a maximum payoff on the close December 1st of 16.90 if the S&P 500 is up 0.56% and a break-even on the upside at 1.26% higher at 2596.90. 

SPX 3

The SPX put spread using December 1st options involves buying the SPX Dec 1st 2565 Put for 20.70 and selling two of the SPX Dec 1st 2535 Puts at 12.30 for a net credit of 3.90.  Going down to the 2530’s would have also realized a credit, but it was below 1.00 which was a criteria I put in place for this exercise.  The result is a maximum profit 33.90 if the S&P 500 is down 1.19% and a downside break-even of down 2.48%% at 2501.10. 

SPX 4

Finally, the SPX call spread using December 29th options involves buying the SPX Dec 29th 2565 Call for 36.10 and selling two of the SPX Nov 24th 2575 Calls at 20.90 for a net credit of 5.70.  The result is a maximum payoff on the close December 29th of 30.70 if the S&P 500 is up 0.95% to 2590 and a break-even on the upside at 2.19% higher at 2620.70. 

SPX 5

The final SPX put trade using December 29th options involves buying the SPX Dec 29th 2565 Put for 36.20 and selling two of the SPX Dec 29th 2495 Puts at 18.90 for a net credit of 1.60.  The result is a maximum profit 71.60 if the S&P 500 is down 2.75% and a downside break-even of down 5.51%% at 2423.40. 

SPX 6

A couple of basic observations.  As expected the farther out in time the expiration is the longer the range of profitability.  Something I expected was a bigger downside range versus upside due to the nature of SPX skew.  However, I was surprised at how much the difference was for the put spreads when compared to the call spreads.  This got me looking at the skew chart from LiveVol Pro which appears below.

SPX Skew

CMG is the symbol for Chipotle Mexican Grill which is a popular stock for option traders as it has a high price and is very volatile.  CMG closed at 285.45 on November 15th which makes the 285 calls and puts the at the money options.  For CMG I had no cushion with respect to the credit level for choosing strikes.  Stated differently, the trades only needed to be at a credit. 

The first CMG call spread used the November 24th options and purchased the CMG Nov 24th 285.00 Call for 5.20 while selling two of the CMG Nov 24th 290.00 Calls for 2.85 netting a credit of 0.50.  A 1.59% move to the upside places CMG at 290.00 which would result in a maximum profit of 5.50.  If the stock rallies more than 3.52%, or above 295.50 that places the trade in the loss column.

CMG 1

The first CMG put spread also used the November 24th options and purchased the CMG Nov 24th 285.00 Put for 4.90 while selling two of the CMG Nov 24th 280.00 Puts for 2.55 netting a credit of 0.20.  A 1.91% move to the downside places CMG at 280.00 which would result in a maximum profit of 5.20.  The downside break-even price is down 3.73% at 274.80.

CMG 2

The CMG call spread using the December 1st options purchased the CMG Dec 1st 285.00 Call for 7.70 while selling two of the CMG Dec 1st 292.50 Calls for 4.00 netting a credit of 0.30.  A 2.47% move to the upside places CMG at 292.50 which would result in a maximum profit of 7.80.  The upside break-even price is 300.30 or 5.20% higher than where CMG was trading.

CMG 3

The CMG put spread using December 1st options purchased the CMG Dec 1st 285.00 Put for 7.10 while selling two of the CMG Dec 1st 280.00 Puts for 4.40 netting a credit of 1.70.  Like the November 24th trade, 1.91% move to the downside places CMG at 280.00 which would result in a maximum profit of 6.70.  The downside break-even price is down 4.26% at 274.80.  Although this trade uses the same options as the November 24th put spread, the result is a wider payout range due to more time left to expiration. 

CMG 4

Going out to the December 29th options results in a trade purchased the CMG Dec 29th 285.00 Call for 13.40 while selling two of the CMG Dec 29th 297.50 Calls for 7.20 netting a credit of 1.00.  A 4.22% move to the upside places CMG at 297.50 which would result in a maximum profit of 13.50.  If the stock rallies more than 8.95%, or above 311.0 that places the trade in the loss column.

CMG 5

Finally, the put spread using December 29th options purchased the CMG Dec 29th 285.00 Put for 11.90 while selling two of the CMG Dec 29th 275.00 Puts for 6.90 netting a credit of 1.90.  A 3.66% move to the downside places CMG at 275.00 which would result in a maximum profit of 11.90.  The downside break-even price is down 7.83% at 263.10. 

CMG 6

Note there is not as much difference in construction between the CMG ratio call and put spreads using CMG options.  Like the SPX example I pulled up the skew chart for CMG options and seeing more of a smile explains the difference between SPX spreads and CMG spreads. 

 CMG Skew