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There is a stock currently trading at $.64.
If I go to options I can do a sell put for $7.50 and then a buy put for 2.50.
Robinhood tells me I get a premium of $470.00 ($.47) and my potential profit is $495 with a potential loss of $5.
This seems to good to be true. Am I missing something here?
You are missing that the odds of you getting that potential profit are very small. You don't mention the strikes of the options, but my guess is that you are looking at a credit put spread. Since the max loss is very low, the current price is deep into the "loss" leg of the spread, meaning the stock will have to rise (or drop, depending on the direction of the spread) significantly for you to break even, let alone make a profit.
With only a $5 loss, it may be worth trying out just to understand the mechanics of options, but most likely you will not make a profit unless you get very, very lucky.
Some answers to additional questions added in another "answer":
So if I pocket the $495 today and in 6 months the stock remained the same or a few cents less Would the $495 premium slowly go away?
No - you received $470 in cash and have a trade that has a roughly -$470 value. The best case for you is the trade ends up with a +$25 value if the stock moves a lot, which is where the "max profit" of "$495" comes from, but a much more likely scenario is that the trade stays at about the same value or worse, meaning at expiry you will owe at least $470, but at worst will owe $475 for a net loss of $5.
Would the $495 premium slowly go away?
The premium does not "go away" but the value of the options (which is a net negative to you) will not change significantly over time - the time decay between the bought option and sold option will roughly cancel out.
Could I always close the option early and keep a lot of the premium.
No - you can close the option and early and pay what the option is worth, which will probably be $470 or more.
There are a number of confusing issues with your question. If you get a premium of $.47 then that's $47 not $470. And if it's a typo , then $470 isn't $495 with a potential loss of $5.
I doubt that you're going to get anywhere near a $4.95 credit for a $5 in-the-money spread. Such options tend to have wide bid-ask spreads. In addition, Robinhood values option trades at the midpoint and it's highly unlikely that you're going to get a trade fill there because most of the time, such deep ITM options are illiquid.
In addition, because the $7.50 put is deep in-the-money, it's likely that you'll be assigned early and have to buy the stock. So you're racking up slippage from wide bid-ask spreads, SEC sell fees and possible commissions as well as possible assignment/exercise fees. $5 disappears pretty quickly.
If you sell a $5 wide vertical spread for a credit of $4.95 then yes, you have a maximum loss of $.05 ($5). But given the aforementioned issues, don't expect to achieve it.
The only redeeming thing about this lottery ticket position is that if lightning strikes, you could make $495. Umm, not likely.
