Why is this trade showing a loss?

That is the question a member asked me today. His question has to do with why a credit spread is showing a loss when the stock is still above the short strike.  Valid question, and one that I get asked a lot by newbies. Here is the question, the answer, a follow up question, and a basketball example. The question is in blue, and my response is in red.

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Now I need to be educated a bit.  I have a question about the very last trade that you placed on April 28th, where you sold 4 May 1310 puts and bought 4 May 1305 puts.  The SPX was at 1355.77 when you placed the trade so I am assuming (perhaps wrongly) that the goal is for it to stay above 1310 and if so we keep the full credit. exactly  
 
I paper traded this along with [...]

Hello OptionGenius.

I have been trading credit spreads for about 3 months now with some success.  I read the nine part  course and realize that my past training didn’t discuss much about selection of trades and adjustment of trades.  When I was looking around the website, I saw a brief reference on how you scan for and pick your trade opportunities, how you use the mathematical models with standard deviation to help your selection and how to determine exit points., but there weren’t too many details on these topics.   Do you share the information about scans, about the mathematical models and how to use them as the subscriptions move along?

Eric,

For credit spreads most traders use technical analysis to find support and resistance and use those levels to pick strikes. I have found that, that strategy works except when it doesn’t. support and resistance are guidelines not walls that the stock will [...]

The first thing to determine is whether the trade is a debit trade, where you pay money for the trade, or a credit trade, where you get money. Iron condors and credit spreads are two examples of credit spreads. Butterflies and Calendar Spreads are debit spreads.

With a debit spread, the max you can lose is the amount you paid for the trade. The max you can gain is harder to determine. I do it using the Analyze tab on my broker’s platform. On a butterfly you can make up to 200% of the debit and sometimes more. On a Calendar you can make 100% of the debit. But you normally will not. At expiration, the profit zone becomes very narrow and the Greeks (delta, gamma, theta, and vega) become very volatile and option prices make huge swings up and down.

On either of these trades, 20% profit is a good number [...]