An expected-value test for vertical option spreads

What the option-spread is

A vertical option-spread uses two options of the same type and the same expiration at two different strikes. It need not involve owning the underlying.

In this archive workflow the option-spread is a same-expiration put pair or call pair used as one testable entry, exit, and abstention procedure.

Four constructions

The four constructions are a credit bull put, a debit bull call, a debit bear put, and a credit bear call. Credit constructions are usually preferred because the underlying can move farther before a loss begins.

A bull-put credit sells the higher put strike and buys a lower-strike put. The thesis is that the underlying stays at or above the short strike through expiration. Platform strike-hit probabilities estimate whether those two strikes are reached first.

The expected-value filter

Expected-value is a pre-entry filter that compares collected credit or paid debit with a probability-weighted strike width so the loss bound is known before the order is placed.

For a bull-put credit, a positive result requires the credit to exceed the product of the two strike-hit probabilities and half the strike width. A bear-put vertical-debit-spread has a positive expectation only when the debit is smaller than that same probability-weighted half-width.

Bull-call and bear-call versions reuse the same hurdle after the two strike-hit probabilities are replaced by the complementary probabilities that those strikes are not reached first.

Expiration, fills, and size

The expectation test holds the spread to expiration and sets aside early offset. Offers far from the hurdle are less likely to fill because listed prices already embed similar technical inputs.

Credit-spread risk is the remaining loss bound on a credit vertical, equal to the strike width minus the credit. Wider strikes can push that bound past a stated account limit, so size is checked before the option-spread is sent.

The income-style procedure takes a play only when the odds filter is favorable and keeps size small enough that a consecutive-loss streak remains survivable.