The biggest problem is the way the settlement value is calculated, which essentially means that it has very little to do with the index value on expiration Friday. In other words, up until expiration Friday the two options have the same underlying, on expiration Friday the underlying is no longer the same and you can end up with an unexpected loss.
I have a couple of rules for these, since I do use bear put spreads. On the day before or the day of expiration, I exit in the following manner: 1) If the long put is OTM, I exit it and let the short leg expire, margin permitting. At least I get some money back; my commissions are low enough so that I get some money back no matter how low the exit price is. 2) If the long put is ITM, I close it out, and allow the short leg to expire. I do not want to have to exercise the put ever. 3) If all of the legs are ITM, I will exit the spread. The extra point or two doesn't matter to me, for I can place new trades and not have the account cash tied up in margin requirements for the expiring trades. If the legs are deep ITM, I will allow them to expire. Using my experience, I am able to judge when to act--in other words, discretionary trading here.
Thanks MTE, it seems the only way to be assured of locking in profit (or avoiding add'l loss) is to exit the entire position prior to expiration. My other thought is to let the short options expire, and use the long Feb. options to build another position, ie butterfly or vertical spread. In this way, I would be reducing my slippage and commissions by only having to pay when I initialize the position. I would be making these trades predominantly during a slower time of the trading day, with not much time to fish for great fills. Finally, I would be afforded two opportunities to short against the same long options positions.
BTW, does anyone happen to know the RUT settlement price for January? The CBOE website seems to be down until tomorrow. Irritating.
You can always look those up on Yahoo!Finance or any other site. The ticker for RUT settlement is RLS and it's 649.05.
The high on Friday was 648.12 which is almost a dollar lower than settlement price. I was short 7 640-650 put spreads and covered it on Wednesday for $5.1 when RUT was around 644. I could hold to expiration and make an additional 2.8k, but I could also lose 3.5k. Was it worth the risk? I think not.
No worries. Btw, the ticker for the settlement for NDX is NDS, for SPX it is SET, and for DJX it is DJS.