What happens at expiration with Short Vertical Call Spread

[jahmul14]

If I Buy the June 50 call for coca-cola and sell the June 47.5 call and have a net credit of .05 what happens at expiration? Do I need to exercise both contracts or do I let the contracts expire if coca-cola is below my break even point.

 

[GammaJammer]

All depends where the stock expires. And relates to just the strike price alone. Your break price (i.e. factoring in the premium) is totally irrelevant. And although different exchanges handle things in subtly different ways, basically if this is an exchange traded rather than OTC options contract you're talking about, there will be an 'official' expiry price, and you will probably be auto exercised for options that are in the money.

I'm not a stock options trader, so those that are, feel free to correct any bits I have got wrong.

GJ

 

[jahmul14]

Just to clarify, if Coca-Cola stays below 47.55 which is my break even level I gain .05. If coca-cola is below this level I don't have to do anything right because the June 50 call expires worthless and I shorted the June 47.50 call so I just keep the premium I got from the short sale minus the cost of June 50 call.

 

[option911]

No, if KO closes above 47.50 you will have to have 100 shares of KO to sell. So on monday you would be short 100 shares of KO at 47.50 (47.55 if you include the .05 you collected on the sale). Well, if the stock is up 1.00 on monday you are out $100.00. My advice, these .05 sales are hardley ever worth it in the long run. But if you are going to do this spread, you have to buy back the 47.5 call if the stock gets over the strike price.

Mark S.
Option 911 Blog