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I'm trying to decipher the following view from a trade I've made on IB. I think I'm missing something important with respect to how trading this option works. Trade P&L.

I understand that the dotted line is today's p&l if today the underlying sat at that price. The solid line is the same thing but on the day of expiration. So what I'm not understanding is why are the lines flipping? Say if we just held the trade today (7th April in picture) our value would be +$162, and similar the next day. A few days before expiration if that was true all the time wouldn't we have accumulated $162*days held in profit? It seems to be that we're losing value to theta at the same rate in reverse.

My breakeven is ~224 so what price am I actually hoping for pre expiration? What is the dotted line telling me that I'm not understanding? Thanks in advance.

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  • In the dropdown on the top-right try some dates other than Apr07 (specifically 5/1) and see if that helps.
    – Hart CO
    Apr 7 '20 at 23:38
  • Hi @HartCO, I've given that a go and it does seem like the lines converge on expiration. I think most of my confusion comes from what is happening with the dotted line beforehand. Are we actually generating profit on the selected day in that case? That would suggest to me that we'd want the underlying stock price to be high for as long as possible on this trade, then at the very last minute flip to lower than my breakeven. Why would that be the case, or am I misunderstanding?
    – ginister
    Apr 7 '20 at 23:55
  • The dotted line makes no sense. Before guessing at its meaning, is this position for one vertical or by any chance are you evaluating 3 of them? The April 7th date represents the value of the dotted line position on that date. The solid line is the expiration P&L of one long vertical. Using 5/01 will give the expiration value which is already depicted (the solid line graph). Apr 7 '20 at 23:58
  • Thanks Bob. I can follow that the solid line represents the P&L on expiration fine. The graph is representing the whole vertical's P&L as opposed to individual leg(s).
    – ginister
    Apr 8 '20 at 0:06
  • The only thing that makes sense for the dotted line is that it represents the P&L of selling the $226 call naked as a standalone position. While I don't agree with IB's P&L and delta numbers, they do approximate what that position would do. The more the underlying drops, the larger the loss. IB's analysis tool for this is crude. You need something better. Apr 8 '20 at 0:32
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You're buying a bearish $226/$215 put vertical for $1.08. Break even is $224.92. The risk is the debit cost and the maximum reward is the difference in strikes less the premium paid or $9.92

What you are hoping for pre expiration is that SPY drops. The sooner, the better. If it dropped to $224.92 tomorrow, you'd have about a $350 profit as compared to breaking even were the SPY to be at $224.92 at expiration.

Because the delta of the spread is less than 1.00, in order to drive both legs of the spread close to parity (very little time premium), SPY would have to drop to approx $190 tomorrow to realize anything close to the maximum value of the spread.

Here's an online spread calculator. It's not great but its graphics are much better than what you displayed in your link: http://optioncreator.com/bear-put-spread

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  • Thanks Bob. In that case I think my general understanding was fairly accurate and the graphing confused me. I assumed it was something to do with the option's value being decayed over time or something else.
    – ginister
    Apr 8 '20 at 9:53
  • If you get a chance, indicate where on IB you found this graphic analysis. I trade there but I use other standalone option tools. I'll take a look at it and see if I can make sense of it. Apr 8 '20 at 11:46

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