Debit spread option strategy
This makes the put debit spread an attractive options trading strategy for markets with very high levels of implied volatility , where buying conventional puts might prove to be too costly. This is essentially the only reason to trade the put debit spread option strategy. Often times, it can be very difficult to make money by purchasing puts due to changes in volatility. If there is a volatility crush, the long put options strategy can result in a substantial loss of value.
With a put debit spread, you are somewhat immune to changes in volatility. This is one of the key reasons why traders love the put debit spread option strategy. Put debit spreads that have lost all of their value prior to expiration, as a general rule, should never be closed out. The risk with put debit spreads, and all debit spreads in general, is the possibility of the strikes of the spread expiring between the underlying asset price. If both legs of the spread expire ITM, then the trade will be a full winner and you will have nothing to worry about.
There will be no need to take action. However, if only the long call portion of a put debit spread is ITM at expiration, your account could face a potential issue if you do not have enough funds to buy the appropriate number of puts.
If the position will create a negative margin impact on your account, they will likely reach out to you via phone and ask you to close out the position. As a responsible options trader, it behooves you to always stay on top of expiring options positions.
This also offsets some of the theta decay from the long put in the put debit spread. Since it takes a rally in the underlying asset for call debit spreads to be profitable, this is NOT a neutral or bearish options trading strategy. Another reason to use the call debit spread option strategy is efficacy. Protection from a collapse in volatility is another reason why traders like call debit spreads.
Theta decay for the call debit spread option strategy is detrimental. In fact, because there are so many different options expirations on so many different assets, you can place a call debit spread with several months to go until expiration and theta decay will have less of an impact on the trade.
Theoretically, you should close out a call credit spread before expiration if the value of the spread is equivalent or very close to the width of the strikes, i. If the spread has already reached its max profit, the only possibility left for the trade is to lose money via a decline of the underlying price. This also depends on the underlying asset, because some are far more liquid than others. If this happens, the outcome of your position depends on the underlying asset.
This is never a problem when you are also assigned short shares for every short ITM call. The worst possible outcome is a margin call. A margin call will probably be issues but it is very easy to rectify by selling the shares.