Profit & Loss: Although I rarely wait until expiration to get out of my positions, I will outline the maximum profit and losses associated with this trade if I waited until March options expiration to close or get exercised on this position. Assuming I could open this option position for the prices outlined above, my maximum risk is limited to $195 per spread, this will occur if Apple trades higher and closes on March options expiration at or above 210 per share. This position will achieve maximum profitability if Apple closes exactly at 200 per share on March options expiration, returning 513% or $805 profit per option spread. This strategy has two break even points, one being Apple at 208.05 per share, and the other at 195.98 per share at expiration (less any commissions). Anything below 195.98 per share at expiration will result in an unrealized loss on shares of Apple (assuming the position is not closed and is exercised). It is important to note the net delta, gamma, and theta for this strategy as well, considering it may be a good idea to trade out of this spread before expiration. Based on current market data some important Greeks to note for this spread are Delta = -0.082, Gamma = 0.014, and Theta = -0.077.
This should not be considered if you think the stock will rally in the near future. However if you feel the stock could move lower but no lower than 4.23% in the near future, this strategy could yield a nice gain. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books.
These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.
The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.
Disclosure: Long AAPL March 210 Put Options, Short AAPL March 200 Put Options