Im doing 1 contract using a Vertical Bull Spread (Selling a Put and Buying a Lower Put yadi.... yadi.... yada) My qyestion is do I exercise my right or do I close the position before expiry. What happens if I just leave it until expiry. All the Option Calls and Puts I bought in the pass, I close the position before it expired. Sorry for the noob question, but I figure I have to start somewhere. Thanks
1) You close the position when it's most profitable 2) Since you sold the vertical, the buyer of your short put controls exercise. Exercising your long put will only come into play if you've been whacked by a drop in the underlying below its strike. The simple answer is that you close positions the way that gives you the most profit/least loss. 3) If you carry the spread to expiry, you pay the intrinsic value to close (if any) or you keep the premium received, netting the two out. 4) One big warning: If the short put is in the money at expiry, you need to deal with it. If you don't, Monday AM your protective put will be expired and you'll be long the stock with directional risk. Don't go there unless that's where you want to be.
It's fine to ask noob questions. However, the fact that you are asking whether to exercise your long put option is proof that you are not anywhere near ready to trade - even one-lots. In general, closing prior to expiry is the best idea. Yes, you have to begin somewhere, and opening a paper trading account and getting yourself some experience is the way to go. Have a little patience as you gain that experience. Keep asking questions. Good trading Mark http://blog.mdwoptions.com
Think of the protective put like a condom. ie: your in thailand and you are having a good old time with a thai hooker, now you blow your wad. Do you keep on trucking or do you pull out and then take that condom out? Well same thing with options, once your deep in there and you blow your wad (ie: your short put is in the money and (if) your long put is in the money) you want to pull out just as well. close out your short put first (gotta pull out first before you remove that condom) and then close out your long put (take your used condom off). Then of course the difference is how much you lost (the price you paid for the thai hooker and cost of condom of course). Once you get good at it you make money in options. ie: you now become the pimp and you collect your earnings and get the sex for free.
I don't remember seeing this kind of comparison to any of the option books I've read but I love it. Thanks King and the rest that gave their replies.
Forex no way!!! Haha I almost don't really want to believe you. I feel naive. Also every time I make a vertical sp I'm going to think of that hooker condom reference. At least for a while. Thanks for that king. Haha too good