Question: First time options trader
By - TheNIOGuy
The funds are available, but the option position will reduce your buying power by (up to) the maximum possible loss.
Typically you'd enter a put credit spread with both strikes out of the money. Was that the case for your trade?
Your profit will increase the more the underlying price increases, and the closer to expiration you get.
Absent a large move in the underlying, you may have to wait until fairly near expiration to get near max. profit.
OK a few questions. So the funds are basically added to the settled cash portion, but my buying power is decreased up to the maximum possible loss?
Yes. The stock price was $14. My short put was sold at a strike price of $15, which credited me 3.44. The long put was purchased at 2.28 with a strike of 13, so the net credit was 1.16. The maximum loss on this spread is therefore 0.84.
I am very bullish on this specific stock, so I believe it will go above $15 before November 20. At that point, as long as the stock stays above $15 I will have realized the profit and the spread will expire. Should I not close this spread before that though?
Another thing (just to confirm if I'm right or not with you), the break even for this spread is 14.16. So as long as the the stock price stays >14.16 I wouldn't loose any money.
is there any situation where I would want to close this spread vs letting it expire?
Anything above 15 at expiration is max profit as both puts would be expiring worthless (out of money).
The decision as to whether to close early is a personal choice, not an obvious categorical decision.
If you're really bullish, you could elect to wait and let it expire worthless and get max profit. Also, if stagnated between the strikes, you could elect to take the assignment at expiration, and hold the stock long. In that case you would no longer be hedged by the 13 put.
The premium collected from writing the credit spread is yours to keep, and will lower your cost basis in the stock.
Also realize that you can close the short side of the spread early and keep the long side if you turn bearish.
Ok. I made a graph in Excel which shows my profit at expiration. How do I realize what the profit would be with with the current stock price before expiration, say this wednesday?
Don't make it complicated for yourself. What you have there is a put credit spread.
Look at the net credit you recieved for the spread when you opened it. I believe you said it was $1.16
Then look at the closing order, buying back the short 15 strike and selling the long 13 strike. That will be a net debit.
That price, relative to the $1.16, tells you the answer to your question. If the net debit to close is less than $1.16, you're going to show a profit. If more than $1.16, a loss. Excluding commissions, which always reduce a gain or increase a loss.
makes sense thanks lol
And you are correct that the 14.16 is your break even in this scenario.
newbie here. I wonder... if the stock was 14 at the time you did the credit spread, I don't understand why you were not immediately assigned to you 15p...