That is an interesting way of looking at it.
I usually try $5 spreads to make it easier to roll - to get the same $10 risk you can sell double the number of contracts (actually a little more risk for more premium in terms of probability).
The other way I've seen people determine the strike is by looking at delta (which I've discussed earlier as probability of SP reaching the strike).
In your example of -235/+245 we get delta of 8% and 3% for a net of 5% probability. Interestingly enough 5% probability (0.05 delta) is for strike 240, which has a premium of $0.42 !
ps : Options are so well designed, there is no arbitrage in terms of risk/premium !
not-advice
Spread width is an interesting topic to me. There are pluses and minuses to all of the choices.
The risk with a $5 wide spread is that the position moves from max gain to max loss over a $5 move in the share price. Example - a -185p/+180p spread will be a max gain with share price >185 at expiration. It is a max loss at share price <180.
As long as you have the discipline around position size so you don't use all of that leverage to open more spreads, then a $5 wide spread can be a very good choice.
If that were a -185p/+135p ($50 wide spread, $150 wide in pre-split $$), then max gain at 185 and max loss doesn't arrive until a share price of 135.
More importantly though, that $50 wide spread has a fairly wide range in which it can be rolled effectively. For some modest share price range when the position goes ITM, you will still be able to roll the spread with a result that is very similar to a CSP. Probably $10 ITM and lower. That gives you more room to maneuver.
The $5 wide spread really needs to be rolled, or the loss taken, before it even gets touched.
Spreads really, really don't behave like a 1 legged position. Max losses are easily reached, and if you're using position sizes that are too large, blowing up your account is readily achievable.
To start, one rather extreme way of looking at (example) a CSP is that it is a spread using a $0 strike put as the insurance leg. I.e. - a 185 csp could also be viewed as a -185p/+0p spread. I realize that's a wonky way of thinking about it
. I might roll my $215 and $220 covered calls sideways to the 14th in case we go down. I have a few puts that I bought but not many. How can we meet the delivery consensus in Q2 now that the Model 3 SR is not going to qualify for the full EV incentive?
