Once again, it comes down to an issue of compromise. Enter into a bull or bear debit spread and early assignment is a favorable outcome and the exit strategy an easy one. Enter into a bull or bear credit spread and early assignment changes the risk-reward profile of the original position, could lead to additional capital being required and may force a closing of the position earlier than planned.
Are credit spreads worth the potential problems? The trade-off here is very easy to calculate. Our spreads on SockStock were established 53 days before option expiration. What is the value of a credit spread relative to a debit spread for this time period? Assume that the total value of the spread ($10) is invested at the risk-free rate (2.00%) and you obtain a value of $0.029. It’s your decision: close to three cents (with the credit spread), or the certainty that early assignment will not result in an unexpected outcome (with the debit spread).
Trade options, stocks, futures + forex on a single platform. thinkorswim by TD Ameritrade.
Lower your costs to maximize your return.
OPTIONS+ is the new mobile options calculator for iPhone users. Download it today.
Get up to $500. Trade commission free for 90 days. Free tools for advanced traders.
Commission Free Trades. Get up to $500 - trade commission free for 90 days & advanced tools.
Download CBOE's new iOS app featuring detailed quotes & option chains, CBOETV, interactive courses, and more.
*Third Party Advertisement