What is the biggest risk in Vertical spreads ?

Hi Guys,

Aside the possibility of assignment of the short side of the vertical spread, what is the other risk which is big in terms of Vertical spreads ?

For example, scenario such as short being assigned for a vertical call spread and then the price going down from the strike. What happens in such a scenario ?

Thank you

 

Maximum risk in a vertical spread is the debit paid if a debit spread and distance between the strikes minus the credit received in a credit spread. nothing more, nothing less.

 

If short is assigned, worst case then is your long becomes worthless.

 

If short is assigned, exercise the long and your position makes maximum reward if a debit spread or maximum risk if a credit spread (as long as underlying is past the long strike).

 

Can we exercise OTM long call options (if the long call is OTM and short call is ITM)

 

You can exercise an American style option whenever you want, moneyness is not an issue.