Quick question on Bull Spread

Discussion in 'Options' started by DrmsOfHvn, Nov 12, 2007.

  1. DrmsOfHvn

    DrmsOfHvn

    I'm just wanting to make sure I understand this correctly.

    Aside from the fact that I maybe should have already gotten out of this trade. If I have a bull spread and the stock is down enough such that my Sold Call P/L is at $0. Can I effectively Buy that call back, and then not be out the loss on the Sold Call when this stock does eventually go where I expect it to? I can't see any reason why this strategy wouldn't work, but I just wanted to make sure. I know I still have alot of studying to do, but I just want to see if I'm understanding this correctly.


    Thanks
    -Drms
     
  2. MTE

    MTE

    I presume you mean that the sold call is worth 0 not that it's P/L is 0. In that case, you can buy back the short and leave the long open.
     
  3. Buying the short call is most likely a good idea if it has a fair amount of time remaining. That will leave you with a long call at a lower strike which won't be encumbered by the drag of the short call should your position start to recover.

    Assuming that your outlook for the underlying hasn't changed, there are several things that you can do with your long call. The first is the easiest. Do nothing.

    Another choice is to consider rolling the call. If you want more time to be right, roll it out. Rolling it down may also be productive. And even down and out. In any of these, you'll be taking the loss and buying fewer long calls with the repatriated capital. You have to run the numbers to see at what price of the underlying each position will break even. If one of the roll possibilities looks better, do it.