Put [Bear or Bull] Spread

Script name: Put Bull spread indicator

Script name: Put Bear Spread indicator

In this manual, we show only the Put Bear Spread. The principles of the two strategies are the same and should be self-explanatory. But, if you have any difficulty with the Put Bull Spread, contact us.

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DISCLAIMER

Options involve risk and are not suitable for all investors. For information on the uses and risks of options, you can obtain a copy of the Options Corporation risk disclosure documented titled Characteristics and Risks of Standardized Options.

 

There is a substantial risk of loss in trading stocks, futures and options. Past performance is not indicative of future results.

 

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

 

We cannot and will not guarantee that you will not lose money or that you will make money from the information found on this website and / or our products or services.

 

Your use of this website and affiliated products/services is at your own risk. You should read TradingView Terms of Use, Policies and Disclaimers, due to the fact that the indicators are running on their platform and website. We make no warranty and assume no obligation or liability for third party services or software.

 

 

 

 

Copyright © 2020, by CHOBOTARU BROTHERS

 

All materials and information are owned by ©CHOBOTARU BROTHERS. The material and information cannot be copied and / or distributed to anyone without the permission of ©CHOBOTARU BROTHERS.

Input parameters explanation

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1.      The debit paid for the strategy (1 unit).

a.       Minimum value: zero; only positive numbers.

b.       If debit for 1 strategy unit is $1 insert 1.

c.       1 unit explained – enter the net debit of 1 spread only.

2.      The stock price when bought/sold the options.

a.       Minimum value: zero; only positive numbers.

3.      Upper Strike price of the strategy.

a.       Minimum value: zero; only positive numbers.

b.      The strike price of the put that was bought.

4.      Lower Strike price of the strategy.

a.       Minimum value: zero; only positive numbers.

b.      The strike price of the put that was sold.

5.      Interest rate: annualized continuously compounded risk-free rate of return over life of the options.

a.       Minimum value: zero; only positive numbers.

b.      U.S. Department of the treasury – find it here

6.      Time to expiration of the options, specify the number of days.

a.       Minimum value: 1; only positive numbers.

b.      Only integer numbers. No half days allowed.

c.       The number of days to expiration has to be matched with the date entered below!  The date and the number of days should not be changed by the user, as time passes.

7.      Annualized asset price volatility, specific as a positive decimal number. IV 10% => input 0.1

a.       Minimum value: zero; only positive numbers.

b.      Find it in the “options chain”, in your brokerage platform.

8.      A calendar day of the month that the option bought/sold.

a.       Input 1 to 31 depending on the calendar date.

9.      Calendar month the option bought/sold.

a.       Input 1 to 12 depending on the calendar date.

10.  Calendar year the option bought/sold.

a.       Minimum value: 1970.

b.      The year format is 4 digits number.

11.  Profit/loss line defined by the user.

a.       Minimum value: -0.95

If the strategy was bought, -0.95 means, the position will be at 95% max loss (unrealized).

b.      Maximum value: 0.95

If the strategy was bought, 0.95 means, the position will be at 95% max profit (unrealized).

Indicator chart explanation

Buying the strategy

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  1. 95% loss line – this line means that if the price got there, 95% of the max loss of the strategy is reached.

  2. Break-even line – this line means that if the price got there, the unrealized profit is zero.

  3. % of the max profit/loss – this line represents the percentage of max profit or loss depending on your input.

  4. 95% of the max profit line – this line means that if the price got there, 95% of the max profit of the strategy is reached.

  5. RR label – this label shows the risk-reward between the max profit to the max loss.

Example:

The strategy price bought: $7.55 (remember the multiplier for stocks is 100, the debit is $755).

The price of the stock: $83.81

The upper strike price: $90

The lower strike price: $75

Risk-free rate: 0%

Days to expire: 53

Implied Volatility: 52.5%

Date: 24/08/2020

Max profit: $745

Max loss: $755

RR label: 745/755=0.98

If at expiration the price will finish above $89.65, the strategy will lose 95% of the max loss (-$717.25).

If at expiration the price will finish at exactly $82.43 the position will break even (white line).

If at expiration the price will finish at exactly $78.70 the strategy will win 50% of the max profit (yellow line) ($372.5).

If at expiration the price will finish at exactly $75.37 the strategy will win 95% of the max profit (blue line) ($707.75).

Different uses for the indicator

Volatility changes: the indicator can be used to give an estimation about the profit/loss lines as a function of volatility changes.

+20% Volatility increase

-20% Volatility decrease

Tip: you could add the indicator twice, so you will have a reference point as the charts above.

Lower timeframes: the indicator can be used for intra-day plotting while using a lower timeframe than Daily. This is automatic.

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Choosing strikes: (out of the money / at the money / in the money)

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Changing percent of max profit/loss

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For Futures users

Please note that the futures indicator and the stocks indicator are not the same.

The algorithm is made of different equations for futures. Also using the stock indicator on futures will not work properly.

The stock indicator on Futures will not work.

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The future indicator on Future will work

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Example on gold futures:

The algorithm is made of different equations for futures.

Even if it looks to be working normally, the result will not be accurate.

In the picture below, the strong lines are the future indicator VS the stock indicator (weak lines).

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Notes

TradingView considerations

 

The indicator is subject to the platform constraints, meaning updates in the platform could change the intended results of the indicator. See the following examples:

Holiday Updates: the indicator is updated 2 years ahead, TradingView updates only the current year. Using long term strategies, especially at the end of the calendar year, could result in a discrepancy at the expiration date that is displayed.

Some indicators have a “fill” option available. When using different timeframes, the fill could be out of place.

We recommend the users to save the indicator settings. This is because once in a while there will be updates in the indicators. Once the update is loaded to Tradingview, the settings will convert to the default settings. We will announce updates in advance.

Algorithm considerations

 

IPO stocks – the life of the option needs to be less than the amount of time the stock is in the market. If it is more, only partial calculations will be displayed. For example, the stock is trading 1 month in the market (ever). Calculating for an option with a life of 2 months will not display the entire calculations for the whole life of the option.

“Data Reset” – loading many bars can result in a slower running time of the indicator. To avoid this, zoom in the chart so you will see only a few bars, then change to different stock, and then change again to the original (intended) stock.

Lower timeframes – the indicator is always doing the calculations, even if it is not being displayed. This can be confirmed when the tag “Calculation complete” is seen. If the tag is displayed but the indicator is not, this can be fixed by reloading more historical bars.

Higher timeframes – the highest timeframe that the indicator can be used, is Daily.

Futures/Stocks – the stock indicators cannot be used for futures and vice versa. Using the wrong indicators on the wrong instrument will result in wrong calculations and errors.

Calculation accuracy – the calculation error is less than 0.01%.

Theoretical model accuracy – the indicator is using the Black-Scholes model. Due to price spreads and/or supply and demand real-world market dynamics, there will be a variation from the theoretical model and the real-world market prices. The model is most accurate when the strike price is close to the instrument price (at the money).

Time accuracy – in the futures markets the indicator might show an extra day after expiration due to holidays. The final result doesn’t change between the last day and the extra day.

Commissions – the algorithm does not take into account any commissions you might have.

Dividends and discounts – the user should be aware of upcoming dividends or discounts.

Personal note

 

If this indicator is truly helpful and gives you viable information please give us credit when using it.

If you have any questions or requests please contact us. We will be happy to help.