Options & Futures/Bear Call Spread
QUESTION: Dear Sir. I have a bear call spread position: Same month expiration, WRITE CALL "XYZ" $60 - premium = $2 and BUY CALL $61 - premium = $1.
At the expiration, the "XYZ" is $65. My loss will be = $1/share.
Before or at the expiration, do I need to do anything AT ALL to close my position above, or I just sit back and relax to let OptionsXpress (the online broker) take care of it?
Thank you, Sir.
ANSWER: Hi Elsa,
With a Bear Call or Bull Put Spread ("Credit Spreads") you never have to take any action once the spread has been initiated unless you want to limit your loss. Since you take in a credit when you first open the position, you have the freedom of letting the spread expire worthless and keeping all the premium that you collected. In the case of your example above, you are at a loss. Depending on how much time you have left until expiration, you my want to avoid taking the total loss and closing out your position early. If, of course, you are OK with realizing the total loss then yes, you can sit back and let OptionsXpress take care of it for you.
Hope this helps. Good luck.
---------- FOLLOW-UP ----------
QUESTION: Would Optionsxpress identify it as a spread since I did the two transactions separately and I didn't identify them as a spread?
Yes, they would identify them as a spread. If you were to have opened your transaction with the short $60 call, your margin requirement would have been enormous being that you would have unlimited risk (if they even let you short the uncovered call to begin with). The long $61 call acts as your hedge to protect your unlimited loss on the short $60 call. Since the stock price is above the short strike, then the $60 call will automatically be exercised forcing you to sell 100 shares of "XYZ" at $60 (If you don't own these shares, you will be short the shares at $60). OptionsXpress will then exercise your $61 call on your behalf forcing you to buy 100 shares at $61 which will cover your short shares. All of this will happen automatically on expiration if you take no action beforehand.