How to calculate return on investment ROI for credit spread and iron condor options

Question:  I am wondering how you go about calculating the percentage return on a credit spread or iron condor option trading strategy? I’d like to be able to do this but don’t know how to calculate it. My goal is to learn how to trade options and then analyze the risk & reward.

Answer:  Let’s say we open qty 1 of a 10 point wide credit spread option, e.g. the RUT 770/780 bull put spread. (i.e. there are 10 points between the sell leg and the buy leg for this option trading strategy)  The broker requires $1000 of maintenance to open this credit spread. When we open this credit spread let’s say we bring in 80 cents credit, or $80. Our risk capital is then $1000 – $80 = $920;  and the probability that our short put will expire out-of-the-money is about 90%. (based on the location of the strike price that we are selecting….basically far out-of-the-money)  The potential ROI is then $80/$920 = 8.8%.  For the 5 point wide credit spreads like we open on the MNX, the broker requires $500 of maintenance.  To calculate the ROI you would use the same math as shown above, but using $500 of maintenance.  For a 2 point wide credit spread like we open on the SPY the required maintenance is $200.




Leave a comment

Your comment