Calculation and mechanics
For a single short option, the opening premium collected is multiplied by the contract multiplier and the number of contracts. For a credit spread, the net premium counts: premiums collected minus the premiums paid for long legs.
The premium collected is not the same as the current profit. As long as the position is open, its market value changes continuously. If it is bought back cheaper or expires worthless, a corresponding profit arises. If it is bought back at a higher price, the result shrinks or a loss arises.
Sold premium = sum of the net opening premiums of the open short-premium strategies
Distinction
The max loss describes the theoretical maximum loss of a position. For simple net-credit strategies, the original net credit is often the maximum profit at expiration. For more complex position structures this does not necessarily hold.
The hedge budget relates the cost of open hedges to the open short premium.
Related terms
- Max Loss (Maximum loss, option max loss)
- Hedge Budget (Hedge cost ratio, hedge budget share)
- Assignment (Option assignment)
- Contract Multiplier (Multiplier)
- Option Strategy (Spread, Iron Condor, Covered Call)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.