Our bear put spread on Cigna continues to move in the right direction, with the stock down nearly $4.50 since we started tracking it. However, with a spread, our profits don’t occur as quickly, but our losses don’t add up as quickly either. This week, I want to explain the different aspects of a trade by using the Optionetics Platinum site. There are many features on this site that help traders understand how a trade will react to various changes. Therefore, I want to explain these different features and how they work with our Cigna trade. First, below is the week-to-week data for our mock trade:

Bear Put Spread
6/3/2003
Cigna (CI) @ 51.36
Buy 1 Oct 50 Put @ 4.40  IV = 39
Sell 1 Oct 40 Put @ 1.20  IV = 46
Initial Debit = 3.20 or $320
Max Risk = $320
Max Reward = $680
Breakeven = 46.80

6/10/2003
Cigna (CI) @ 49.66
1 Oct 50 Put @ 4.60 (bid) IV = 41
1 Oct 40 Put @ 1.20 (ask) IV = 44
Initial Debit = 3.20 or $320
Current Credit to close = 3.40
Profit = $0.20

6/17/2003
Cigna (CI) @ 48.64
1 Oct 50 Put @ 5.10 (bid) IV = 42
1 Oct 40 Put @ 1.60 (ask) IV = 47
Initial Debit = 3.20 or $320
Current Credit to close = 3.50
Profit = $0.30 or $30 per spread

6/24/2003
Cigna (CI) @ 47.75
1 Oct 50 Put @ 5.20 (bid) IV = 39
1 Oct 40 Put @ 1.50 (ask) IV = 45
Initial Debit = 3.20 or $320
Current Credit to close = 3.70
Profit = $0.50 or $50 per spread

7/01/2003
Cigna (CI) @ 46.89
1 Oct 50 Put @ 5.40 (bid) IV = 37.7
1 Oct 40 Put @ 1.40 (ask) IV = 42.0
Initial Debit = 3.20 or $320
Current Credit to close = 4.00
Profit = $0.80 or $80 per spread

Below is a snapshot of our Cigna spread using Platinum through trading on Tuesday, July 1. Let’s discuss the different areas of this page so that we can get a better feel for the Cigna trade.

Figure 1: Platinum Table for Cigna Trade

The top portion is basically the information about the trade we have entered. The model column is the price that the system figures is right given implied volatility and other input factors. With our trade, we can see that the model is in line with the actual bid/ask price. When first looking at a trade, we can use this column to see if the options are under- or over-valued.

The middle portion of the page shows the information that I really want to discuss. To the left of the line, we have the basic information about the trade. The profit figure is calculated using the bid/ask prices above. Move over to where it says Delta (Shares) and let’s discuss this point.

Delta is the measure of how much the option(s) move for a one-dollar move in the underlying security. For our trade on Tuesday, the Delta of the entire spread is -36.5. This means that for each dollar move higher, our trade loses $36.50. The opposite also holds true, in that a dollar move lower would increase our trade value by $36.50. Many traders ask how a spread makes money when we have bought one option and sold another. Even with this type of trade, we still have an advantage. When investigating a trade, we can look at this to see if we are getting enough bang for our buck.

The next column is Gamma and this also impacts how delta will react. Gamma is the amount delta will change for each point move in the underlying security. With a gamma of 1.4798, delta will increase by this amount if Cigna moves higher by one dollar. The opposite also holds true, with delta falling by this amount on a drop of one dollar for Cigna. We can see from these two columns that as the stock drops in value, our trade would become more and more profitable.  

Vega is the amount the trade will increase in value with one point increase in implied volatility. At $2.91, this isn’t a huge gain in value, but it does show that an increase in IV does help the trade.

Theta is the time decay factor for our trade. At $-0.33, time decay is not affecting this trade much at the moment. This is because the time decay of the short option is offsetting the time decay of the long option. This is one of the advantages of using a spread over a straight call or put.

All of this information is shown in graphic form by the following graph:

Figure 2: Risk Graph of Cigna Trade

Though all of this information could be figured on your own, it is tedious and Platinum puts it right there in front of you each day. There are great discussion boards on Optionetics that talk about the features of Platinum and how to use it to help you profit. I have only shown a very small portion of what it can do.

Overall, our Cigna bear put spread is moving along nicely, even though the stock has run into a prior support level. Once this area is broken, the stock should be on its way to the $40 area.

To search for previous articles in this series, please click here.


Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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