What is the biggest risk in Vertical spreads ?

[traderwald]

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

 

[tommcginnis]

 

[El OchoCinco]

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.

 

[ironchef]

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

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

 

[El OchoCinco]

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).

 

[traderwald]

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)

 

[El OchoCinco]

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