Explore Your Options by Tom Gentile
TO CLOSE OR NOT TO CLOSE
I have a put credit spread on a stock
where the sold leg is out-of-the-money
and the bought leg is deep in-the-money.
I have already bought back the sold leg
and the bought leg is left to be exercised.
Should I let the buy leg be exercised
and reap the profit or should I
close it out before expiration?
If you have a put credit spread, the
trade was entered by selling a put and
also buying a put with a lower strike
price. Basically, selling the put credit
spread is the same as selling a put, but
another put with a lower strike is purchased
as a hedge. Simply selling puts
would expose the investor to more risk
than trading the credit spread.
The “credit” from the put credit spread
comes from the fact that the option with
the higher strike price has more premium
than the put with a lower strike
price. Puts with higher strike prices are
worth more than puts with lower strike