OptionsHouse’s Put Spread Investigator scans the universe of equity options to find put spreads with high theoretical returns. To do this, Put Spread Investigator:
- Multiplies the return if the underlying stock in a put spread reaches the lower of the two strike prices by the probability that it will reach that price, as determined by option Greeks
- Subtracts from this amount the cost of acquiring the put spread using market prices for the put options
- Divides the resulting amount by the cost of acquiring the put spread to determine the theoretical return.
In addition, Put Spread Investigator attempts to filter out bad data and spreads that may be overly complicated because they are the result of a corporate reorganization.
Because put spreads with high theoretical returns often have strike prices well below the current stock price, the probability of achieving the theoretical return is often low.
