Vertical Spreads For Your Stock Investment Option
The selection and management of a vertical spread for a stock investment option are only two-thirds of the game. Closing out, rolling or morphing the position has to be analyzed and executed with the same due diligence as was used in the selection and management processes.
Looking at the closing out of a vertical call spread for a stock investment option, we find there are three possible outcomes that must be addressed. The stock investment option spread can finish out-of-the-money and valueless. For a call spread, this scenario occurs when the stock investment option closes at or below the lower strike of the spread. In this scenario, in order to close out the stock investment option spread, one would just let it expire. Both options finish out of the money so no residual position will be left over.
If the stock investment option spread finishes fully in the money, (at maximum value) that is with both options in-the-money, then both options will be exercised. You will exercise your long call and your short call will be assigned. They will cancel each other out and you will be left with no residual position. This scenario occurs when the stock investment option price closes lower than the lower strike call involved in the spread.
To read more, go to the Stock Investment Option website by clicking on this link.
