- Premium (P) = $2.00
- Current Price (CP) = $91
- Strike Price (SP) = $90
- Expiration Price One (EP1) = $95
- Expiration Price Two (EP2) = $89
- Expiration Price Three (EP3) = $70
Gain = P * 100 - Max(SP-EP,0)*100
Example One
Gain = $2.00 * 100 - Max($90-$95,0)*100 = +$200
Example Two
Gain = $2.00 * 100 - Max($90-$89)*100 = +$100
Example Three *correction*
Gain = $2.00 * 100 - Max($90-$75,0)*100 = -$1300
In the last example, things become clear. If you sell a ITM Put contract, which gives the buyer the option to sell (to you) the underlying and obligates the seller (you) to purchase the underlying at the strike price (regardless of the expiration price), and at expiration the underlying is worth less than the premium gained you've lost money. This is a good thought experiment. Simply put if you want to own the underlying of an option, there is a break-even point as to where its more profitable to purchase the stock instead 0f selling an ITM Put. I would've made this mistake if I hadn't performed this little experiment. I'd like to see this information available on all trades, when confirming in TOS.
BTW - These numbers are randomly generated and are not taken exact from an options spread.
