Stocks & Commodities V. 23:10 (45): Explore Your Options by Tom Gentile

Stocks & Commodities V. 23:10 (45): Explore Your Options by Tom Gentile

Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.

EXITING A SPREAD

I once read about three ways to exit a spread, but I don’t remember them all. I know I can close the position through an offsetting transaction. What are the others?

Spreads include combinations of options that are bought (or long) and options that are sold (or short). If a trader holds a spread with a combination of long and short options, three things can happen. The first is to close the position by initiating an offsetting or closing transaction. In that scenario, the strategist would buy back the short options and sell the long ones.

Alternatively, the position can be held through expiration and the options can expire worthless. This often happens with successful credit spreads. For example, if a strategist is in a bear call spread, which is created by selling a call and purchasing a call with a higher strike price, the trade creates a credit. This credit is earned because the short call with the lower strike price will have a greater premium than the long call. If the stock falls and remains below the strike price of both call options at expiration, the options can expire worthless and the strategist keeps the credit. Thus, with some spreads, letting the options expire is a viable and desirable way of exiting the position.