Are you always covered in vertical spreads?

[RomanW]

There is a gap in my knowledge that I can't seem to fill so far.

Say you are doing a bull call and by expiration the call you bought has reached above breakeven but it has not reach high enough to sell the one you shorted. Does this leave you uncovered? If so how can you resolve this? I would not want to buy the stock after all.

Being a visual guy I thought I would quickly sketch out what I mean.

 

[RomanW]

Trying to answer my own question (although uncertain of my validity) this could be the only way to cover. If the stock price sits above breakeven and below the short call - you will have to short another call that is in-the-money to cover yourself before expiration. I am assuming this is called exiting the trade before expiration.

Thanks in advance.

 

[Splitlink]

Is that a bull spread or a calendar spread? If it is a bull spread they will expire at the same time, no?
You could not be exposed to the short unless it is open i.e. it has a further expiry date.

Sorry, long time since I traded options, therefore, this is just a suggestion.

 

[RomanW]

Is that a bull spread or a calendar spread? If it is a bull spread they will expire at the same time, no?

Yes, this is a bull call spread with identical expirations. My query is if you have the right to buy (stock price is above breakeven by expiration) but you haven't got the obligation to sell (stock price is below the short call by expiration) how do you profit from this spread without buying the stock?

 

[Splitlink]

Yes, this is a bull call spread with identical expirations. My query is if you have the right to buy (stock price is above breakeven by expiration) but you haven't got the obligation to sell (stock price is below the short call by expiration) how do you profit from this spread without buying the stock?

You'll have excuse my rustiness but, from what I remember, the argument is that no one is going to exercise your options if the share can be bought more cheaply in the market. The time value is there until expiry and that is where the money is made.

Hope I'm helpful until someone more experienced comes along!

 

[RomanW]

You'll have excuse my rustiness but, from what I remember, the argument is that no one is going to exercise your options if the share can be bought more cheaply in the market. The time value is there until expiry and that is where the money is made.

Hope I'm helpful until someone more experienced comes along!

It's OK, I'm grateful for any kind of help, suggestion or criticism.

What you explained is a part of my problem. Because the person I am selling the call option to will not exercise their right (because the price is cheaper in the market) I have no one to sell it to, meaning on expiration I can either reject my right to buy stock (so I waisted money buying premium) or exercise my right buy the stock. I don't have the intention to buy the stock, I wanted to profit from the spread.

 

[Martinghoul]

None of this makes any sense... You're overcomplicating it beyond reason. You're never "uncovered".

 

[RomanW]

None of this makes any sense... You're overcomplicating it beyond reason. You're never "uncovered".

Could you explain how you are never uncovered? This over-complication comes from my misunderstanding, thus that is why I am here, to ask for help to correct my understanding.

 

[Splitlink]

Because you have a spread that limits your maximum loss. However, close the call side of that spread, leaving the written side open and you are not covered at all. You are in a risky situation because if that share drops 75% and you are exercised, you have to buy those shares in the market and sell them to him at his exercise price. Socrates tried to convince posters , a couple of years ago, that he was on to a good thing with a similar idea. He was selling naked put options but, unfortunately, the market went the other way while he was doing it. We have not heard from him since.

 

[neil]

Are you always covered in vertical spreads?

Then you need....:

Gets rid of those pesky spreads in no time at all folks:

 

[Martinghoul]

Could you explain how you are never uncovered? This over-complication comes from my misunderstanding, thus that is why I am here, to ask for help to correct my understanding.

If you're long the spread to expiry, your maximum possible loss is limited to the total net premium you paid. If you unwind one of the legs, it stops being a spread and turns into smth else.

 

[maxima]

i can tell it from my personal experience without theory - your broker will assign and exercise in the same time (even if price is between the strikes) and the equity position will be 0 in the end. so dont worry be happy.

 

[RomanW]

I'm not sure I have the answer I am looking for yet. I'll rephrase my question.

You're long ATM 100 Call and short OTM 110 Call. Breakeven is 104.

The stock never goes above 110 but you stick it out to expiration where the stock is trading at 108, 4 profit.

This appears to be a long call position. What do I do now? Exercise/buy stock at 100 then instantaneously sell the stock at market price of 108?

What if I don't have the capital to buy the stock at 100? Could I profit from this spread without exercising at expiration? Short the call that I am long before expiration?

 

[maxima]

or may be you should stick to simple instruments.. for now..

 

[RomanW]

or may be you should stick to simple instruments.. for now..

I'm not touching any options until I have a good understanding of them. I've only just gotten started. Not going to simply give up because I currently don't understand something.