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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.

Can someone please explain these differences?

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

Example 1:

SELL JAN 15 '21 $4 PUT
BUY JAN 15 '21 $3 PUT

Max profit: $49 (initial credit)

Max loss: $51

r:r almost 1:1

Example 2:

SELL DEC 18 '20 $4 PUT
BUY DEC 18 '20 $3 PUT

Max profit: $31 (initial credit)

Max loss: $69

r:r nearer 1:2

Example 3:

SELL DEC 18 '23 $4 PUT
BUY DEC 18 '23 $3 PUT

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.

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  • thin markets are irrelevant
    – Fattie
    Oct 22 '20 at 20:58
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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.

This is a terrible candidate for comparing the R/R of various spreads for several reasons.

The open interest is low as is the daily volume of contracts traded so the B/A spreads vary significantly.

Given what I saw in real time, your quotes don't add up. Either you're using a broker like Robinhood which gives you the midpoint or perhaps you're looking at stale quotes. Verify that you used the respective bid and ask prices for each leg of the spread.

Check the date for the third spread. There are no December '23 LEAPs for equities.

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 ...

That is correct. Because the $3 put is further out-of-the money than the $4 put, it is less sensitive to change in time remaining until expiration (as well as to change in implied volatility). So if you add more time, the time value of the $4 put increases more than that of the $3 put and therefore, the spread credit increases, improving the R/R ratio.

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.

This is incorrect. They are not the same.

You can verify this with an option pricing formula (software, Excel, web site).

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