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  • Atricle Dump - Vertical Spreads - Getting Out or Rolling the Position

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    e, if there is still time, you
    could always trade out of the option then but that is very
    risky. However, if the stock is at a relatively safe distance
    from the out-of-the-money you may want to just close out the
    in-the-money option and let the out-of-the money option expire
    worthless.

    The two factors that must be considered are: the combination of
    the distance of the strike from the stock price in relation to
    the short amount of time for the stock to get there, and the
    amount of money saved by not buying back the out-of-the-money
    option. Remember, this is being done at the very end of the day
    on expiration day. These o
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    The selection and management of a vertical spread 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, we find
    there are three possible outcomes that must be addressed. The
    spread can finish out-of-the-money and valueless. For a call
    spread, this scenario occurs when the stock closes at or below
    the lower strike of the spread. In this scenario, in order to
    close out the spread, one would just let it expire. Both options
    finish out of the money so no residual position will be left
    over.

    If the 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 price closes lower than the lower strike call
    involved in the spread.

    The difficult scenario is when the stock closes in between the
    two strikes of the spread. This scenario, the closing of the
    stock between the two strikes creates a situation where one
    strike winds up being in-the-money while the other ends up
    out-of-the-money.

    When both options expire in-the-money, they are both
    exercised-one creating a long stock option, the other creating a
    short position thus canceling each other out. This is not the
    case here. Here, one option, the one that is in-the-money will
    leave a residual stock position and since the other option is
    out-of-the-money, it will not be able to be used to offset the
    residual stock position created by the expiring in-the-money
    option.

    There are two actions that could be taken. Choice number one
    involves trading out of the spread on expiration Friday just
    before the close. Because of the bid/ask spread of the two
    options, you will probably have to give away some of your
    profits in order to close out the position.
    Giving up a portion of the profits may be the best thing to do
    in order to avoid naked, unlimited risk.

    If you only trade out of the in-the-money option, you run the
    risk (albeit short-lived because you are doing this late on
    expiration day of the expiring month) that the stock moves
    adversely and the out-of-the-money option suddenly becomes
    in-the-money. If that happens, you will now be naked the
    residual stock position. Of course, if there is still time, you
    could always trade out of the option then but that is very
    risky. However, if the stock is at a relatively safe distance
    from the out-of-the-money you may want to just close out the
    in-the-money option and let the out-of-the money option expire
    worthless.

    The two factors that must be considered are: the combination of
    the distance of the strike from the stock price in relation to
    the short amount of time for the stock to get there, and the
    amount of money saved by not buying back the out-of-the-money
    option. Remember, this is being done at the very end of the day
    on expiration day. These op
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    the money so no residual position will be left
    over.

    If the 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 price closes lower than the lower strike call
    involved in the spread.

    The difficult scenario is when the stock closes in between the
    two strikes of the spread. This scenario, the closing of the
    stock between the two strikes creates a situation where one
    strike winds up being in-the-money while the other ends up
    out-of-the-money.

    When both options expire in-the-money, they are both
    exercised-one creating a long stock option, the other creating a
    short position thus canceling each other out. This is not the
    case here. Here, one option, the one that is in-the-money will
    leave a residual stock position and since the other option is
    out-of-the-money, it will not be able to be used to offset the
    residual stock position created by the expiring in-the-money
    option.

    There are two actions that could be taken. Choice number one
    involves trading out of the spread on expiration Friday just
    before the close. Because of the bid/ask spread of the two
    options, you will probably have to give away some of your
    profits in order to close out the position.
    Giving up a portion of the profits may be the best thing to do
    in order to avoid naked, unlimited risk.

    If you only trade out of the in-the-money option, you run the
    risk (albeit short-lived because you are doing this late on
    expiration day of the expiring month) that the stock moves
    adversely and the out-of-the-money option suddenly becomes
    in-the-money. If that happens, you will now be naked the
    residual stock position. Of course, if there is still time, you
    could always trade out of the option then but that is very
    risky. However, if the stock is at a relatively safe distance
    from the out-of-the-money you may want to just close out the
    in-the-money option and let the out-of-the money option expire
    worthless.

    The two factors that must be considered are: the combination of
    the distance of the strike from the stock price in relation to
    the short amount of time for the stock to get there, and the
    amount of money saved by not buying back the out-of-the-money
    option. Remember, this is being done at the very end of the day
    on expiration day. These o
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    on where one
    strike winds up being in-the-money while the other ends up
    out-of-the-money.

    When both options expire in-the-money, they are both
    exercised-one creating a long stock option, the other creating a
    short position thus canceling each other out. This is not the
    case here. Here, one option, the one that is in-the-money will
    leave a residual stock position and since the other option is
    out-of-the-money, it will not be able to be used to offset the
    residual stock position created by the expiring in-the-money
    option.

    There are two actions that could be taken. Choice number one
    involves trading out of the spread on expiration Friday just
    before the close. Because of the bid/ask spread of the two
    options, you will probably have to give away some of your
    profits in order to close out the position.
    Giving up a portion of the profits may be the best thing to do
    in order to avoid naked, unlimited risk.

    If you only trade out of the in-the-money option, you run the
    risk (albeit short-lived because you are doing this late on
    expiration day of the expiring month) that the stock moves
    adversely and the out-of-the-money option suddenly becomes
    in-the-money. If that happens, you will now be naked the
    residual stock position. Of course, if there is still time, you
    could always trade out of the option then but that is very
    risky. However, if the stock is at a relatively safe distance
    from the out-of-the-money you may want to just close out the
    in-the-money option and let the out-of-the money option expire
    worthless.

    The two factors that must be considered are: the combination of
    the distance of the strike from the stock price in relation to
    the short amount of time for the stock to get there, and the
    amount of money saved by not buying back the out-of-the-money
    option. Remember, this is being done at the very end of the day
    on expiration day. These o
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    pread on expiration Friday just
    before the close. Because of the bid/ask spread of the two
    options, you will probably have to give away some of your
    profits in order to close out the position.
    Giving up a portion of the profits may be the best thing to do
    in order to avoid naked, unlimited risk.

    If you only trade out of the in-the-money option, you run the
    risk (albeit short-lived because you are doing this late on
    expiration day of the expiring month) that the stock moves
    adversely and the out-of-the-money option suddenly becomes
    in-the-money. If that happens, you will now be naked the
    residual stock position. Of course, if there is still time, you
    could always trade out of the option then but that is very
    risky. However, if the stock is at a relatively safe distance
    from the out-of-the-money you may want to just close out the
    in-the-money option and let the out-of-the money option expire
    worthless.

    The two factors that must be considered are: the combination of
    the distance of the strike from the stock price in relation to
    the short amount of time for the stock to get there, and the
    amount of money saved by not buying back the out-of-the-money
    option. Remember, this is being done at the very end of the day
    on expiration day. These o
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    e, if there is still time, you
    could always trade out of the option then but that is very
    risky. However, if the stock is at a relatively safe distance
    from the out-of-the-money you may want to just close out the
    in-the-money option and let the out-of-the money option expire
    worthless.

    The two factors that must be considered are: the combination of
    the distance of the strike from the stock price in relation to
    the short amount of time for the stock to get there, and the
    amount of money saved by not buying back the out-of-the-money
    option. Remember, this is being done at the very end of the day
    on expiration day. These options only have minutes of life left.
    So, knowing this, the risk is somewhat mitigated, but still
    there none the less.

    The catch is the proximity of the stock to the out-of-the-money
    option. If the stock is close to the out-of-the-money option,
    you would be best advised to trade out of the spread entirely.

    Again, as stated before, if the stock closes either with the
    spread fully in-the-money, or fully out-of-the-money, the
    position will adjust itself through the exercise process leaving
    no residual position. If the stock price finishes between the
    two strikes, there will be a residual position. We discussed
    above how to trade out of this position. Your second choice is
    not to trade out and allow yourself to go through the expiration
    process. You must remember that if you are going to accept a
    residual stock position, you must be able to afford it.

    Then, if you have 10 July 50 calls and you exercise them you
    will be receiving 1000 shares of stock at $50.00 per share.
    Thus, you must have $50,000.00 of cash and/or margin in your
    account to receive the stock. If you do not have enough cash
    and/or margin to accept delivery of the stock, then you must
    trade out of the position before it expires.

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