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intro to spreads

Short Call Vertical

Analyzing the risk profile of a short call vertical

What Happens At Expiration?

If the Spread Expires ITM

If the entire spread expires in the money, it will be a maximum loser. You will be obligated to sell 100 shares at your short strike, but you will have the right to buy the shares you need at your long strike. Since you are buying high and selling low, this will result in a loss.
Figure 4

If the Spread Expires OTM

If your spread expires out of the money, the trade will be a maximum winner! Both of the options will be worthless, so there is no
or
to worry about. You will get to keep the entire credit you originally received for the spread as profit and the options will disappear from your portfolio by the next day of business.
Figure 5

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 OTM and your short leg is ITM. If this happens, you will be
on your short leg, and your long leg will expire worthless. Short call assignment means you will be obligated to sell 100 shares at the strike price. If you don't already own 100 shares, you will find 100 short shares in your account the next day of business. Your long strike will disappear entirely.
Allowing your short strike to expire ITM, and your long strike to expire worthless will result in a short share position with unlimited risk to the upside. This can get messy, and is probably not what you intended when you first established the position. Because of this, we typically avoid the scenario entirely by
the spread out in time or closing it altogether. Rolling out simply means closing the current spread, and selling the exact same strikes at a later expiration date. It is a defensive tactic which we will discuss in a future article.
Figure 6 Figure 7

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