Lets say you have a butterfly spread (bull) and the strikes are 45/55/65. The stock price reaches 55 and you'd like to get the $5 profit but it still has 2 weeks to expiration, can you just execute and sell/buy the options so that it doesn't move away from the $55?
Not exactly, you can only exercise the options that you bought and are ITM. Even then you would lose some time premium. You can close the entire position at its current value, change it into something different, or wait.
No, it will not get to near $5 until 4pm on expiration. If you leave it on to expiration, and your lucky enough to have the stock pin at the middle strike, you will have a lot of pin risk for Monday morning. It's unreasonable to ever expect any spread to go to max profit. You should have some exist strategy prior to 4pm Friday. If you still like the strategy, I would suggest rolling the fly to another month before Thursday/Friday of expiration.
Hi sir, in order to avoid pin risk, I'd just have to sell the options back to the MM and eat the cost of that spread, correct?
To avoid pin risk, you need to buy back any option you're short, that is very close to the strike where the stock might close. That removes uncertainty. You can choose on long strikes what you want to do.
Prior to expiration is where you get the most profit from time decay of your middle strike short options assuming they are atm. Thats what you can do, buying to close your shorts, but it doesn't make any sense. If you feel the market rallies, then yes, you should buy back your shorts. Otherwise you won't make your maximum profit, you can even leave with loss if there is too much time prior to expiration. It depends on the contract months for your spread. Best way to see it is some bitter experience.