The most a defined-risk position can make, reached at a specific price or range at expiration.
For a credit structure it is the net-credit received. For a debit vertical it is spread-width minus the net-debit. For a long-butterfly it is the width of one wing minus the debit, reached only at the body strike.
Knowing it up front prevents the most common sizing error: sizing on credit collected rather than on capital at risk. A $75 maximum profit against $175 of risk is a very different trade from the same $75 against $2,000.
Example: the XYZ $45/$42.50 put spread sold for $0.75 has a maximum profit of $75 per spread, achieved anywhere above $45 at expiration. No amount of further rally adds a cent.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.
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