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Max potential profit incorrect?
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Max potential profit incorrect?

  #1 (permalink)
 Vendor: diversifyportfolio.com 
PTA, Gauteng
 
Futures Experience: Advanced
Platform: Self built + Sierra + TWS
Favorite Futures: Stocks and Options
 
DarkPoolTrading's Avatar
 
Posts: 1,036 since May 2012
Thanks: 1,244 given, 1,304 received

Max potential profit incorrect?

Hey all,

When selling a credit spread the max potential profit is the credit received minus costs. Im confused by the attached screenshot of IB TWS. In it there is a put credit spread being sold for 63c however the max return is shown as being $25.

The commission is estimated as being between $1.38 to $3.98. Therefore for the round turn the commission should be at most $8 resulting in a max profit of $55. Or letting the position expire worthless (if that happens) would be less commission. So then why is $25 being shown?

Im confused. What am I missing or misunderstanding?

Diversification is the only free lunch
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Last edited by DarkPoolTrading; October 17th, 2015 at 06:04 AM.
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  #2 (permalink)
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  #3 (permalink)
 Vendor: diversifyportfolio.com 
PTA, Gauteng
 
Futures Experience: Advanced
Platform: Self built + Sierra + TWS
Favorite Futures: Stocks and Options
 
DarkPoolTrading's Avatar
 
Posts: 1,036 since May 2012
Thanks: 1,244 given, 1,304 received


Well im still confused. Here is another example:

Credit spread taking in a credit of $28. Therefore the max potential return should be $28 minus costs. Yet IB TWS is showing max profit as $13. That would mean that the commission on this trade would have to be $15 which is not the case.

I'll contact IB if no one replies soon, in the mean time I was just waiting to see if there's something basic that im simply misunderstanding before I try to get an answer out of IB support.

Diversification is the only free lunch
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  #4 (permalink)
 Vendor: diversifyportfolio.com 
PTA, Gauteng
 
Futures Experience: Advanced
Platform: Self built + Sierra + TWS
Favorite Futures: Stocks and Options
 
DarkPoolTrading's Avatar
 
Posts: 1,036 since May 2012
Thanks: 1,244 given, 1,304 received

So after contacting IB I was told that the reason for the incorrect figures is that the performance profile ignores the limit price you have entered and simply calculates everything based on entering 'at market'.

This is really stupid in my opinion and really not difficult to correct if IB wanted to. The IB support guy said this issue has been raised before and passed on to the developers but nothing has been done. Apparently the fact that this makes the performance profile just about useless is not important to them. The wider the spread, the more useless this tool becomes. Since options are often not very liquid, having this tool perform all of it's calculations based on entering at market is really stupid.

Anyway, now I know the reason.

Diversification is the only free lunch
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