bring your perspective vertical spread into the analyze tab by setting up a trade in the trade tab and then select analyze duplicate trade in the drop down you get from clicking the button just to the left of the trade on the trade tab (make sure the price lock is in the unlocked position so you get the mark, or mid-bid/ask, price for the spread.)
|gld credit vertical in trade tab|
|gld credit spread in analyze tab|
now, for a debit spread the calculation is slightly different. i take the probability of winning and multiply by width of the strikes thus: .39 * 1 = .39 as shown below for the buy-side of this same spread:
|gld debit vertical in analyze tab.|
geeky mathematical aside:
an even-money trade occurs when the win/loss ratio equates to the risk/reward ratio or:
(1) win/loss = risk/rewardif i am trading even-money then there is no free lunch. if i win frequently then i should lose big on the occasional loss OR if i lose frequently then i should win big on the occasional win.
(2) risk = strikewidth - rewardthis is the definition of a the vertical spread. the expiration price of the spread can be no greater than the strike-price differential between the short and long option. thus reward+risk must equate to strike price width.
(3) win probability = 1 - losing probabilitysomething's gotta happen, a win or a loss. i discount the miniscule chance that the price of the underlying is exactly the break-even price at expiration - that's a little like the chances of a flipped coin landing on the edge.
now, by substituting (2) and (3) into (1), i get:
(4) (1 - loss)/loss = (strikewidth-reward)/rewardnow, by dividing each term of the parenthetical expressions in (4) by the respective divisors, i get:
(5) 1/loss -1 = strikewidth/reward -1finally, by adding 1 to both sides of (5) and solving for reward, i get:
(6) reward = strikewidth*loss probabilitythis is the math of the method of finding the even-money price of a credit spread that i demonstrated above.
if your eyes haven't glazed over from the sheer geekiness of the above, relatively simple, high school algebra, then, you might find it a worthy exercise to show that:
(7) risk = strikewidth*win probability
the even money price of a debit vertical.