Last week I came across the following Tweet:
I see an excellent risk/reward trade right now:— The C O N T R A R I A N (@ZeContrarian7) April 16, 2020
Buy 1 S&P500 (ES Mini), Strike 2,840
Sell 2 S&P500 (ES Mini), Strike 2,870
max gain is $31 at S&P 2870
You start loosing above S&P 2,900
Open for credit of +$1
Close tomorrow based on mkt moves pic.twitter.com/w7LwJcIMNM
And the following followup the next day:
Closing position for a 1,300% return https://t.co/zXDDKquTIW— The C O N T R A R I A N (@ZeContrarian7) April 17, 2020
1,300% return in one day??
This is how the trade looks in ONE software at the time of the opening:
ONE shows a maximum return of only ~7%. What is going on here?
This trade is long one call and short 2 calls. Which means one of the calls is naked and requires huge margin requirement.
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When the trade was closed on Apr.17, this is how it looked:
Explanation for "1,300% gain"?
This calculation ignores the margin requirement on the short options. When a trade requires a margin (like credit spreads or naked options), the return cannot be calculated on cash outcome - it has to account for margin requirement.
As a side note, it was a good trade. No downside risk, and upside risk starts at 2,900 (over 100 points move in one day). But the gain was nowhere near 1,300%.