Questions about call spreads

[optrader782]

Lets say I buy the AAPL $540 calls that are already trading for $5.00 and I sell the $545 calls against that are trading for $3.50. Now i have a $1.50 debit and a $3.50 max reward. I understand that part. However, what if i want to take off the trade before expiration, lets say the stock goes above $545 but because of time decay my $540 call options are still only worth $5.00, and I want take off the spread. How will I get the max $3.50 profit this way?

Basically, should i hold until expiration to get the max profit? Can someone please explain when its best to hold the spreads to expiration (if though you already in the money) or take them off at that point?

Thank you

 

[stoic]

Quote from optrader782:

...lets say the stock goes above $545 but because of time decay my $540 call options are still only worth $5.00, and I want take off the spread. How will I get the max $3.50 profit this way?

Basically, should i hold until expiration to get the max profit?

Generally holding on to expiration is not part of the strategy. It would incur transaction costs. The buy of the underlying at the 540 strike and maybe the sell at the 545 strike.

If the long 540s are only worth $5.00 with the underlying at 545 because of time decay, one would have to say the there is no time premium. If there is no time premium in the 540s one would expect the time premium on the 545s to be very very low. The same time decay acted on the 545s. So for example, one sells to close the 540s @ 5 and buys to close the 545s @ .15 for a credit of $4.85.

In applying this strategy one would not expect to get the full max profit unless one expected the stock to move so all options are very deep ITM. If that were the expectation you'd just want to be long the calls.