Here we are going to examine four different debit put spreads for SPY with August expiration date. SPY is currently trading at 161.28.
The 167/164 and 165/162 spreads are in the money since both the long and short options have strike prices above the current price. The 163/160 spread is at the money since the long option’s strike price is above the current price and the short option’s strike price is below the current price. The 161/158 put spread is out of the money since both strike prices are below the current price. All spreads are 3 point wide.
What I am interested is to find out how the strike prices affect the maximum profit, the breakeven point and the maximum loss. I also want to know the probabilities associated with the maximum profit, breakeven point and maximum loss. The table below shows the data I calculated and used and the chart summarizes the results. The table and the chart clearly shows that in the money debit spreads have much higher probability and even if the stock moves against you, you can still make money. You don’t have to be bearish to use this strategy. In the money debit spreads work well in neutral market conditions.