Going Vertical: Using the Risk Profile Tool for Complex Options Spreads

Once you’ve learned to use the Risk Profile tool on the thinkorswim® platform for single-leg options, you may wish to use it for more complex trades.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Vertical Jump: thinkorswim Risk Profile
3 min read
Photo by iStock:Rupena

Key Takeaways

  • Set up and analyze an options spread using the Risk Profile tool 
  • Learn to read the tool’s visual display
  • Adjust the parameters, such as time and implied volatility, to analyze a position in various scenarios

If youre an option trader using the thinkorswim® platform from TD Ameritrade, odds are youre familiar with the Risk Profile tool. Not only can it provide a single visual risk snapshot, but it can also help you estimate changes in a trade’s profile given certain changes in risk components such as time and volatility. From the basic long call option to a complex, multi-leg ratio spread, think of the Risk Profile as the Swiss Army knife of options analysis.

Ready to see it in action? Let’s start with a vertical spread—the purchase of a call or put option, paired with the sale of another call or put of the same expiration month, but with a different strike. (Need a refresher? Read about the basics of vertical spreads and selling vertical credit spreads.)

The following, like all of our strategy discussions, is strictly for educational purposes. It is not, and should not be considered, individualized advice or a recommendation.

Make That Vertical Leap

Building a vertical spread using the Risk Profile tool is about as simple as entering a one-leg order such as a long call—there are just a couple selections to make. On the Analyze tab, select Add Simulated Trades and enter your ticker symbol. Start by right-clicking on a strike that you'd like as part of your vertical spread and then select Analyze buy trade or Analyze sell trade (see figure 1). This will bring up a menu of spread choices. Select Vertical (or whatevers your spread du jour).

Analyze vertical options spread

FIGURE 1: ANALYZE A VERTICAL SPREAD. To analyze a spread, right-click any strike and choose the strategy. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

As an example, we’ll analyze selling the 105-100 vertical put spread, which is the sale of the 105-strike put and the purchase of a 100-strike put. In our example we’re selling the spread for a credit of $0.61 (times the options multiplier of 100 = $61, minus transaction costs).

To get the visual display of the simulated trade, under the Analyze tab, select the Risk Profile subtab (right next to Add Simulated Trades). You’ll see a chart of potential outcomes for the trade (see figure 2). Remember that this is an estimation based on theoretical values; trades in the real market might perform differently.

Risk profile of short vertical put spread

FIGURE 2: RISK PROFILE OF A SHORT VERTICAL PUT SPREAD. The chart shows a risk profile of one 105-100 short put spread sold for $0.61. The purple line is the present-day profile; the blue line shows the profile on the options expiration date. Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Scenarios and the Numbers Behind Them

The blue line in figure 2, which represents the profit and loss (P&L) of the trade at expiration, has two kinks in it. Those are the strike prices of the spread. The purple line is the estimation of the spreads P&L as the price of the underlying changes. For instance, if the underlying were to go to $107 today (1), the trade would be down about $47. But then if the underlying remained at that level until expiration (2), the trade could end up making $61. Both legs would expire worthless, and you’d keep the premium minus transaction costs.

The graph demonstrates how the passage of time helps this trade if the underlying stays above the high strike of 105. However, if the underlying drops to $96 today (3) and stays there until expiration (4), todays loss of about $300 would become a full loss of $439 by expiration. Why? Because if both strikes finish in the money, you’ll be assigned a long stock position at $105 per share and you’ll exercise your 100-strike put, selling your stock at $100 per share and essentially locking in a $5 loss. But you collected a $0.61 credit when you sold the spread, so your net loss would be $4.39 times the contract multiplier of 100, or $439, plus transaction costs.

And remember, you can analyze the trade using other future dates prior to expiration, and at other levels of implied volatility, by using the Lines and Step buttons.

Do you have multiple positions within that same stock? Do you have a position in the stock itself? A complex, multi-leg spread? More than one expiration date? This tool can give you a single visual display. 


Key Takeaways

  • Set up and analyze an options spread using the Risk Profile tool 
  • Learn to read the tool’s visual display
  • Adjust the parameters, such as time and implied volatility, to analyze a position in various scenarios
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Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Please note that the examples above do not account for transaction costs or dividends. Options orders placed online at TD Ameritrade carry a $0.65 fee per contract. Orders placed by other means will have additional transaction costs.

Spreads and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return. These are advanced option strategies and often involve greater risk, and more complex risk, than basic options trades.

Probability analysis results are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring.


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