Accounting

When using spreads, it can be daunting figuring out the accounting.
For example, I start out with 10,000. I buy this amount in options long. Now I sell options. This is premium I collected. For sake of ease here lets just say I received 30%. Now I have 3,000 back in my account. A tidy 30% return if everything goes as planned.

But lets say we took the 3,000 because we want to gain more and buy some more options and once again sell to collect premiums. Now we have just taken on more options than we have in cash to start with. What will this show on our accounting? It should show that we are now at about the same level of 10,000 that we started with. So you ask yourself where did the 30% go? It went to owning another position. We now have 13,000 in options long and the equivalent outstanding short.

So as we roll out to the next month we collect more premiums and if we buy more spreads, we once again are back to 10,000. Our net gain is showing nothing while we are slowly gaining more and more positions. So eventually we would own more than twice as many options as the original 10,000 but only show a slight gain.

If you want the income, then you simple do not buy more positions and let the cash pile up with each roll out. However if you are in the stage in life where you are wanting to increase your assets, then you will want to keep buying more positions ignoring the fact that the overall gain on your account is minimal but you are gaining more and more positions in your portfolio.

It sounds more complicated than it really is. The point here is that you will be hard pressed to figure out just exactly how much you are gaining if you continue to buy more positions, since each new position will once again drain the cash you have and show a slight loss until the spreads starts to work its way through. Then once again any cash would be put to work thereby showing again no increase in cash value, but you are gaining more and more positions.

I hope this helps.