How to calculate ROI returns of index credit spreads and iron condor options

Question:  I’m a new subscriber to MCTO and I’m puzzled about something.  I was just looking at the ROI for the June 2012 trades. You show a total of 10.5% return for the June cycle,  but when I look at the individual trade details none of the trades returned anything close to 10.5%; most were between 5% and 7%.  So, I don’t see how you average 10.5%.

Answer:  When we open two credit spreads that complete the iron condor, the broker only holds maintenance for one side.  For example, if we open both a qty 1, RUT July 710/720 bull put spread and a qty 1, RUT July 840/850 bear call spread, the broker’s computer knows that these two credit spreads create an iron condor, so the broker will only hold $1000 of maintenance.  The math goes as follows:

A 10 point wide RUT credit spread requires $1000 of maintenance
Both credit spreads use the same index, are the same width and have the same expiration date, so the computer will attach these two spreads together to create an iron condor
Let’s say we brought in 50 cents for the top spread and 70 cents for the bottom spread
Total credit that we collected was 50 + 70 = $1.20, or $120
Risk capital is $1000 – $120 = $880
Assuming that the RUT settled at the end of the cycle (usually 30 days or less) above 720 and below 840, the ROI of this trade would be 120/880 = 13.6%.

 

Leave a comment

Your comment