there are reasons why nobody has responded to your last post on options This is my question: For debit spreads, do you have to exercise the options i.e take stock for a time period to profit? or are you able to close them before hand for a profit? "The question was meant to ask that, if you have an ITM call debit spread at expiration, when the value is fully realized, do you have to manually exercise the long call and buy the shares and then let the short call get assigned on the day of expiration to full profit? Or can you close the position before expiration and gain a profit in some way. To further that, does that happen on the day of and you see shares in your account and taken from your account? or does the exchange happen at the end of the day and the change in your account appears on the monday. If someone could answer that, that would be great. thanks. Telling me to look up put call parity doesn't answer that. " above was a post from cryon851 hint: you received no responses. it is not because they don't know the answers to your questions.
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Mr. Crayon, I will try to answer your question directly. You seem to be asking why your call spread is not worth $1 before expiration when the underlying is above the upper strike. The answer is that the market is pricing in some positive probability that the price falls before expiration. The reason people are telling you to look up PCP is because PCP tells you that your expectation of $1 value for a $1 ITM spread before expiration is equivalent to expecting a $0 value of the OTM put spread with the same strikes. If you don't see why, do the math until you do. When you keep asking "do I have to exercise", I think you are missing the point. If you exercise early, and then wait for the upper strike to expire, then yes, you will make your full $1 __IF__ the price stays above the upper strike. However, that is the same gain you would get simply by waiting for both options to expire, if the price indeed stays that high. What SIUYA is trying to tell you is that exercising early (besides throwing away time value) will give you a position of long shares and a short call. This is another reason to learn about PCP -- it tells you that long shares and a short call are equivalent to a short put. So, do you have to exercise to realize $1 immediate profit? No. Is there any way to force immediate $1 profit? No. More importantly, if you do exercise, then rather than facing a max loss of whatever you paid for the spread, you would face a max loss defined by the stock going to zero. That is, exercising not only gives you no extra gains, it puts you in danger of larger losses with zero compensation. If I had sold you the spread myself, my best possible outcome would be for you to exercise early in this fashion. Finally, on a personal note, you may want to try being more humble and appreciative on this site. No one here is obligated to help anyone else, but you will find that many people here are willing to give of themselves and help a great deal - if only you will put in some effort on your own and sincerely try to learn. Your response about people not answering the question you asked shows 1) ignorance, because they did answer it, just in a way that required you to work for it; and 2) a sense of entitlement, because your response implies that you think everyone here has an obligation to spoon-feed you information. As an educator, I can tell you that students who try to learn and are humble about their lack of knowledge eventually go far. Those who think that others owe them information in exactly the format they want usually sputter out rather quickly. I hope this helps. mj
my sincere apologies to zdreg. It was meant to be directed to Crayon who asked the original question.
that helps, but i guess i might not have been clear on my initial question and for all the negativity its generated, ill apologize for that. i just wanted to know if i had to manually exercise the contract on expiration day, or if the broker would do it automatically, assuming the vertical spread is ITM. i hope that clears things up. and ftr, i have looked up and understand the basics of put call parity. and my understanding is this: basically they are equal and combinations of the two are equivalent. if im wrong, correct me. thanks.
if you had used your education the question about option exercise would never have been posted. it is obvious that you did not goggle options automatic exercise. as to put call parity it is doubtful that you realize its significance.
why are you still on my case? i know that the short positions get auto exercised, just not sure of the long positions. youre right i dont know the significance of it, thats why im still reading up on it.