Hi Guys, a quick question about vertical spreads. From my understanding, in a vertical put spread(credit spread), the maximum loss is reached when price falls below the lower strike price. If price gets to the lower strike price and below , well before expiration, does the position get closed automatically, or will it be left open till expiration,( which would present a chance that price might drift back above the higher strike price and into profitability). Thank you for your time.
Is that an European sparrow? Or an African sparrow? It makes a difference. Thus: OR, you could go to your option chain(s), but a vertical together, and observe for yourself.
It doesn't get closed automatically and in fact your pnl will reflect only a portion of the max loss, leaving the rest of it (if it does stay below your long put until expiration) to be slowly arrived at through time decay (your position will be negative theta). Although having an ITM short position (call or put) puts you at risk of assignment, early assignment is unlikely since the option holder would be foregoing the remaining time value of his/her position if he/she exercises (with the exception of short deep ITM calls on underlyings with an upcoming dividend)