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  • Add You - Vertical Spreads - Cost Relationship between Corresponding Put Spreads and Call Spreads

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    3.00. The chart below is a floor trader’s pricing sheet that
    shows where individual options are trading and what they are
    worth based on each trader’s individual inputs.

    From this we can calculate the price of any spread. Pick any
    vertical spread. Now, calculate the value of a vertical call
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    We have demonstrated that vertical spreads have intrinsic value,
    and that we can roughly determine their value by comparing stock
    price to strike prices. There is another relationship that can
    help investors determine value. That is the relationship that
    exists between corresponding vertical spreads.

    When we use the term corresponding we mean the same month, the
    same strikes in the same stock. The only difference is between
    calls and puts. For example, the XYZ Sept. 30 – 35 vertical call
    spreads’ corresponding spread would be the XYZ Sept. 30 – 35
    vertical put spread. Similarly, the ABC June 70 – 80 put
    spreads’ corresponding spread would be the ABC June 70 –80 call
    spread.

    The importance of understanding the relationship of
    corresponding vertical spreads is that the sum of a vertical
    call spread and its corresponding vertical put spread is going
    to be equal to the difference between the two strikes.

    If the April 30 – 35 call spread trades at $2.00, then the April
    30 – 35 put spread will be worth $3.00. Let’s review this. The
    difference of the two strikes is $5.00 and the cost of the call
    spread is $2.00. That means the cost of the put spread will be
    $3.00. The chart below is a floor trader’s pricing sheet that
    shows where individual options are trading and what they are
    worth based on each trader’s individual inputs.

    From this we can calculate the price of any spread. Pick any
    vertical spread. Now, calculate the value of a vertical call
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    When we use the term corresponding we mean the same month, the
    same strikes in the same stock. The only difference is between
    calls and puts. For example, the XYZ Sept. 30 – 35 vertical call
    spreads’ corresponding spread would be the XYZ Sept. 30 – 35
    vertical put spread. Similarly, the ABC June 70 – 80 put
    spreads’ corresponding spread would be the ABC June 70 –80 call
    spread.

    The importance of understanding the relationship of
    corresponding vertical spreads is that the sum of a vertical
    call spread and its corresponding vertical put spread is going
    to be equal to the difference between the two strikes.

    If the April 30 – 35 call spread trades at $2.00, then the April
    30 – 35 put spread will be worth $3.00. Let’s review this. The
    difference of the two strikes is $5.00 and the cost of the call
    spread is $2.00. That means the cost of the put spread will be
    $3.00. The chart below is a floor trader’s pricing sheet that
    shows where individual options are trading and what they are
    worth based on each trader’s individual inputs.

    From this we can calculate the price of any spread. Pick any
    vertical spread. Now, calculate the value of a vertical call
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    June 70 – 80 put
    spreads’ corresponding spread would be the ABC June 70 –80 call
    spread.

    The importance of understanding the relationship of
    corresponding vertical spreads is that the sum of a vertical
    call spread and its corresponding vertical put spread is going
    to be equal to the difference between the two strikes.

    If the April 30 – 35 call spread trades at $2.00, then the April
    30 – 35 put spread will be worth $3.00. Let’s review this. The
    difference of the two strikes is $5.00 and the cost of the call
    spread is $2.00. That means the cost of the put spread will be
    $3.00. The chart below is a floor trader’s pricing sheet that
    shows where individual options are trading and what they are
    worth based on each trader’s individual inputs.

    From this we can calculate the price of any spread. Pick any
    vertical spread. Now, calculate the value of a vertical call
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    ifference between the two strikes.

    If the April 30 – 35 call spread trades at $2.00, then the April
    30 – 35 put spread will be worth $3.00. Let’s review this. The
    difference of the two strikes is $5.00 and the cost of the call
    spread is $2.00. That means the cost of the put spread will be
    $3.00. The chart below is a floor trader’s pricing sheet that
    shows where individual options are trading and what they are
    worth based on each trader’s individual inputs.

    From this we can calculate the price of any spread. Pick any
    vertical spread. Now, calculate the value of a vertical call
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    3.00. The chart below is a floor trader’s pricing sheet that
    shows where individual options are trading and what they are
    worth based on each trader’s individual inputs.

    From this we can calculate the price of any spread. Pick any
    vertical spread. Now, calculate the value of a vertical call
    spread or a vertical put spread. Once you’ve done that,
    calculate the value of its corresponding vertical spread. Add
    the two spreads together and see if that sum is equal to the
    difference between the two strikes. Perform the calculations
    several times on different vertical spreads. Try it on $5, $10
    and even $15 spreads.

    It is not necessary to understand the rationale for why this
    works at this time. It will be covered in a future Options
    University release. For now, it is important to understand that
    these spreads are related and the price of one can help you
    calculate the price of the other.

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