Hey trader,
Every option spread comes with a price. That price sets your required win rate, the share of trades you need to win.
A spread is two options traded together, one bought and one sold. The distance between the strikes is the width, which caps the payout.
Overpay for that width, and you need to win more often than the market expects.
Good setups can still bleed money over time when the price is wrong.
On Thursday, I ran this math in the end-of-day room on a Walmart call spread. It cost $3.40 for a spread $6 wide.
That price set my required win rate at 56%. The platform put the odds at about 57%, so I knew I wasn’t overpaying.
A Broadcom spread I priced that afternoon needed 67% against the platform’s 62%.
Running this check takes one division and a number your platform already shows. You can do it on your next spread before you pay a dime.
Here’s the math on both spreads, plus the gap that tells me to walk away.
How Price Sets Your Required Win Rate
A debit spread costs money up front. The most it can ever be worth is its width.
That makes the math simple. Divide what you pay by the width, and you get your required win rate.
The price divided by the width is your required win rate.
A credit spread works the same way from the other side. Its required win rate is your risk, the width minus the credit, divided by the width.
Your trading platform runs its own number on every spread. It estimates the odds that price finishes at or past your break-even level.
I put my required win rate next to the platform’s number. Together, they show me what the market maker is charging.
A market maker is the firm taking the other side of your order. It’s going to keep a cut on every trade.
Thursday’s Walmart Check
Walmart broke out of a long-term trend this week. From a breakout near 108, my minimum target is 115.
I checked first whether to sell premium or buy it. The puts wouldn’t pay even 2% at the money, which told me to be a buyer.
I priced a call spread, buying the 107 call and selling the 113 call. That’s $6 wide, and it cost $3.40.
Here’s how the numbers broke down:
- $3.40 divided by $6 put my required win rate at 56%.
- Break even sat at 110.40, the 107 strike plus the $3.40 cost.
- Walmart was trading at 110.90 when I ran it.
Then I set the platform to show the odds at break even. It read 56.6% in one spot and close to 57% in another.
My required win rate was 56%, and the market priced about 57%. I called it a fair trade, since I wasn’t even paying the market maker’s cut.
I ran these numbers in my afternoon video and again for the room. I never reported a fill on the Walmart spread, so I won’t claim a result on it.
When The Gap Gets Too Wide
I grade the gap against my required win rate on a simple scale:
- 0% to 3% is the normal market-maker cut. If I need 60% and the platform says 57%, that’s their spread.
- 3% to 5% happens from time to time.
- Over 5%, you’re being robbed.
Broadcom shows the edge of that scale. The stock sold off hard Thursday, and I priced a $5-wide put spread paying a $1.65 credit.
My risk was $3.35, the width minus the credit. Divide $3.35 by $5, and my required win rate came to 67%.
The platform said 62%. That 5-point shortfall put the trade right on the edge of overpriced.
Volatility was running high on the selloff. They were charging me too much for my safety net.
I also called Broadcom a falling knife. I showed the room the numbers and didn’t take the trade.
Sometimes the fix comes down to your fill price. A $10-wide Dollar Tree call spread cost $5.30.
That put my required win rate at about 54%. The platform read 48%, because the bid and ask sat too far apart.
At $5, that same spread turns into a one-to-one trade at a fair price. I’d only want it if I could get filled there.
Check Your Required Win Rate Before Every Spread
You won’t beat the market maker on every spread. You just don’t want to pay more than the normal cut.
You can run this check before your next spread in three steps:
- Find your required win rate. Divide the debit by the width, or divide the width minus the credit by the width.
- Pull the platform’s odds. Most analysis tools show the probability at your break-even price.
- Compare the two. Inside 3% is normal, and more than 5% short means you pass or work a lower limit.
If the market prices your odds 5% below your required win rate, the spread costs too much.
That’s my line, and it doesn’t have to be yours.
I price option trades out loud before I take them. On Friday in the 10% Club, I called a QQQ 745 put at 50 cents on two contracts.
Before anyone clicked buy, I told the room the max risk ran about $100. The puts filled instantly at 50 cents.
Stop changes go into the room’s chat and announcements, even after I move to the futures room. You’ll know the cost and the risk while the trade is still live.
Divide the price by the width, then let the odds tell you whether to pay it.
Blake Young
Senior Market Strategist, TheoTRADE
