Bear put spread

If I were to put on a bear put spread, would I need to have enough cash to excise options in case the out of money put that's sold gets excised?

 

Bear put spread means you have a long put that's a higher strike than the short put you sold. So you're covered by nature of how the spread was established.....google for 'bear put spread' for more info -- though (with respect) if you are asking this 'basic' question about an options strategy, i hope you're paper-trading and not using real money.

 

Lower strike still has stock to be called away. Are you saying that I can just sell the lower strike (profitable) and simply buy back the higher (sold) strike?

that would seem logical. I just don't know how often people that write options have to excise.

 

Sorry - I am heading out for a while but these should answer your questions as to your 'options' on these options (pardon the pun) come expiration.

http://www.optionsxpress.com/educate/strategies/bearputspread.aspx

http://www.callsandputs.com/desc_BearPut.asp

http://www.optiontradingpedia.com/free_bear_put_spread.htm

I never hold debit spreads thru to expiration, so I can' t comment on the strategy, sorry.

 

I have googled the phrase already myself but they never go into specifics and details

thanks for the links though

 

The word is exercise not excise.
An out of the money option will not be exercised.
The risk in a debit vertical spread, whether a bull or bear spread, is the debit that you pay. If you buy the higher put for 4 and sell the lower put for 2.5 then your maximum risk is 1.5.
If your short put goes in the money enough to get exercised then you will be assigned long stock, therefore you now have long stock and long puts and can exercise your long put to end up with a flat position and have achieved your maximum profit (which is the difference between the strike prices minus the debit you paid).

These are just the absolute basics, as already stated, no one should trade options until they understand a lot more than the basics.

 

yes but if I'm long the stock does that mean I need the cash reserves to be able to buy the x shares at y price?

 

If you are looking at individual positions by themselves then, yes a trader needs to cover the margin of the long stock he is assigned via the short put. However, you don’t just have long stock once exercised on your short put, you have long stock and a long put and the cash you had to have to initiate the put spread in the beginning covers your maximum risk. This all assumes that you are doing a standard bear spread with the same number of long puts and short puts.

What you are asking about does answer the question as to why the broker will not let you leg into the spread by selling the short put first, or by selling your long put by itself once the spread it on. In those cases you are short a naked put, even for a short time, and the broker will require you to cover the margin of possibly being long the shares.