# Calculating the P&L of a Vertical Spread AT Expiration

Calculating the profit of a vertical spread at expiration is relatively straight forward.  The buyer of the spread has the potential to make the difference between the strike prices of the long and short options, minus the cost of entering the trade.  For this to occur, the price of the underlying futures contract would have to be beyond the strike price of the sold option.  Using the example above, the trader would be profitable by 25.00 before considering transaction costs, or \$1,250 (25 x \$50) points if the price of the S&P was above 2125 at expiration.  This is figured by subtracting 2075 from 2125, and then factoring in the 25.00 points to purchase the vertical spread.

# Calculating Vertical Spread P&Ls BEFORE Expiration

Predicting the profit and loss of a vertical spread at any point before expiration is much more complicated; in fact, it is impossible. Before expiration, the spread profit or loss is determined by the widening or narrowing of the difference between the option values on the two legs of the spread.   Because the premium of each of the options involved in the spreads are based on factors that cannot be quantified, such as demand, expectations of future volatility, emotion, and timing; the value of a vertical spread before expiration cannot be forecast.  Any attempt at such is nothing more than an educated guess.

In addition, monitoring profit and loss of a vertical spread in real time can be frustrating. When trading vertical spread strategies, being right on market price is only half the battle.  We’ll discuss this further in the following sections.

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