Can someone please help explain these spread max profit/max loss differences?

sacbnc

Junior member
11 1
I've been looking at call spreads and put spreads and observed some vastly different risk/reward ratios even when the same spread width is used.

I'm hoping someone can explain how this comes about.

All examples use symbol ACB and I won't consider commissions.

Example 1:

SELL 15 JAN 21 PUT @ strike 4
BUY 15 JAN 21 PUT @ stike 3

Max profit: $49 (initial credit)
Max loss: $51

r:r almost 1:1

Examples 2:

SELL 18 DEC 20 PUT @ strike 4
BUY 18 DEC 20 PUT @ stike 3

Max profit: $31 (initial credit)
Max loss: $69

r:r nearer 1:2

Example 3:

SELL 18 DEC 23 PUT @ strike 4
BUY 18 DEC 23 PUT @ stike 3

Max profit: $81 (initial credit)
Max loss: $19

r:r nearer 4:1

So we see that the r:r ratios differ dramatically despite using the same strikes.

There seems to be a simple pattern here that the further our the options are the higher the r:r, which can make sense from a time premium point of view, but this equally confuses me when the put I'm buying should be costing me roughly the same time (in proportion) to the time premium I'm gaining as credit from the sell.

Hope I've explained this well enough!
 

drcruz

Junior member
38 12
@sacbnc, @sideways-sid is correct you need to provide the deltas to accurately analyze what you are asking. Also need to provide where the stock is trading at.
Example 1 may be ATM which may account for the 50/50 nature of the spread. ATM is usually 50 delta.
Example 2 looks like a normal credit spread that is OTM w/ a delta <50, high probability of closing OTM
Example 3 looks ITM w/ > 50 delta and low probability of closing OTM
 
 
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