How to Calculate Greeks for Spreads
Let us assume we are long 1 January 40 call and short 1 January 45 call. Our handy option calculator says that the delta for the 40 call is .50 and the delta for the 45 call is .30. We want to find the delta for the entire spread. We will multiply each delta by the position size. For a long position we multiply by +1, for a short we use -1. Then we get the following:
+1 * .50 - 1* .30 = .50-.30 = .20
So our net delta is .20 for the overall spread. This is interpreted as being roughly equal to being long 20 shares of the stock.
To calculate a net theta we would do the same. Suppose the theta for the January 40 call is -.02 and the theta for the January 45 call is -.022 then using the same +1 and -1 convention, as above we would get:
+1 * (-.02) -1 * (-.022) = +.002
So by this calculation we see that the net theta for our spread would actually earn us .002 per day.
Click here for a 14-day free trial to Options Profits
Phil McDonnell has professionally traded options for decades. He has developed extensive proprietary software for options analysis and probability calculations. He was founder and software developer for Dollar/Soft which sold options analysis software. Since then he has devoted himself to full-time options trading.
Phil is a frequent contributor to Daily Speculations. He has also authored a book titled Optimal Portfolio Modeling which was published by Wiley Trading in 2008. The web site for Android versions of the book is at:
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV