Bull Call spread - basic question

Discussion in 'Options' started by max_max, Feb 14, 2011.

  1. max_max


    Hello there,

    I have just started learning options, so please forgive this really basic question...

    When you do a bull call spread (buy call 350/sell call 355 -same month)... do you have to wait until expiration to get your gains? for instance, if the stock goes up to 357 after 1 week, do you have to wait until expiration to collect your gains? or can you sell the spread as soon as the price reaches the higher strike price?

    thank you
  2. stoic


    You can sell the spread at any time. How ever, the profit would not be the same as if the underlying was above the high strike in the last week of the life of the spread. Example: You paid 2.25 for the spread, after one week and the stock advances to 357 the spread may only be at 2.75.
    This is assuming the underlying started at 350 on options with about 60 days to go and a constant IV of 22%
  3. max_max


    thank you. that is exactly what i wanted to know....

    now a couple more questions in regards to your answer...

    what is the common practice amongst options traders regarding bull call spread? Do they usually wait for the options to expire and exercise their right, or do they sell the spread prior to expiration?

    also, considering i will be using think or swim when i do decide to start trading, how does the exercising work? Does the platform automatically buy 100 shares (provided 1 contract) of 350 and then sell 100 shares of 355 for a profit? if so, do they require you to have the funding necessary to cover the purchase of 100 shares at 350?

    thank you
  4. stoic


    The most common exit of the Bull Call spread is to sell the spread. I cannot say what Think or Swim policy is on option exercise, but I do know of some online brokers that charge the full service commission rate on buys and sells done via option exercise and assignment, so allowing the options to expire In-The-Money may involve additional commission and fees.

    One can always expect the option to be exercised if the option is In-The-Money. If in your question the Auto-Ex produced a buy in your account @ 350 and simultaneously the sell @ 355, YES they would expect your account to have the required funds for the purchase. If the accout lacks the funds it would be considered a Free Ride violation.
  5. Shagi


    Thats why trading options is like sucking on lemons.:mad:
  6. max_max


    thank you so much