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intro to spreads
Long Call Vertical
Analyzing the risk profile of a long call vertical
What Happens At Expiration?
If the Spread Expires ITM
If the spread expires in the money, it will be a maximum winner! The short leg will be (meaning you will sell 100 shares at the higher strike), and the long leg will be automatically (meaning you buy 100 shares at the lower price). The exercise and assignment would cancel each other out leaving you with a net profit equal to the width of the strikes, less the debit you originally paid. In general, it makes more sense to just sell to close the spread instead of going through the exercise and assignment process to avoid the fees. Tastyworks allows you to close your positions for free, but if you take assignment it will cost $5 – might as well save that money to pay for lunch!
If the Spread Expires OTM
If your spread expires out of the money, the trade will be a maximum loser and both legs will be completely worthless. There is nothing to do in this scenario. Let the legs expire, and by the next morning they will disappear from your screen. So sad.
If the Spread Expires On the Dance Floor
When the share price is directly between your strikes, it is commonly referred to as "the dance floor." In this scenario your long leg is in the money and your short leg is out of the money. If the position is about to expire, you have two options:
Unless you want to exercise your right to buy 100 shares at your long strike, your best bet is to close the position and move on. This will avoid acquiring the larger risk of 100 long shares.
- Let it expire and allow your long leg to be exercised while your short leg expires worthless
- Close it out by selling the long leg and buying back the short
Unless you want to exercise your right to buy 100 shares at your long strike, your best bet is to close the position and move on. This will avoid acquiring the larger risk of 100 long shares.
