At or Above Higher Strike

OEX Index is at or above higher strike price of 605 at expiration

If the OEX exercise settlement value is exactly at the higher strike price of 605 at expiration, the short 605 call will be at-the-money and expire with no value.

The long 600 call will be in-the-money and worth its cash settlement amount:

605 (settlement value) – 600 (call strike price) = \$5 x \$100 = \$500

The investor could exercise the long OEX 600 call to receive its cash settlement amount of \$500 and see a profit:

\$500 cash settlement amount received at call’s exercise
- \$275 total debit initially paid for call
\$225 profit

If the OEX exercise settlement value is above the higher strike price of 605, then the investor could expect assignment on the short 605 call and have to pay its cash settlement amount. However, the investor would exercise the 600 call and receive its cash settlement amount, which would always be more than 605 call’s by \$500 (difference in strikes of \$5 x \$100 multiplier).

As an example, say the exercise settlement value of the OEX index is 608.

\$800 settlement amount received at 600 call’s exercise (\$8 intrinsic value x \$100)
- \$300 settlement amount paid at 605 call’s assignment (\$3 intrinsic value x \$100)
\$500 net cash amount received at expiration

Total net profit at expiration, after exercise and assignment, would be:

\$500 net cash settlement amount received
- \$275 total debit initially paid for spread
\$225 profit

On the other hand, if the OEX 600/605 call spread is sold for its intrinsic value as the market settles at 608 on the option’s last trading day, the premium received would be:

\$8 intrinsic value of 600 call (608 OEX level – \$600 strike price)
- \$3 intrinsic value of 605 call (608 OEX level – \$605 strike price)

The total profit would be the same as after exercise and assignment of the call contracts:

- \$275 total debit initially paid for spread
\$225 profit

This profit of \$225 represents a return on an initial investment of \$275 total premium paid for the call spread of approximately 81.8% over the 2-month life of the spread.

NOTE: If at any point before expiration the investor feels confident that the long call will expire in-the-money and the short call out-of-the-money, and wants to sell the long call realize a profit or cut a loss, the entire spread should be closed out. Selling only the long call would leave the investor with an uncovered short index call position that has unlimited risk as well a margin requirement, even if the call is sold on the last trading day.

NOTE: Because OEX options are American-Style, assignment may occur at any time before expiration. Early assignment becomes more likely when a short call is in-the-money with little time value remaining. If an investor is assigned early on the short call side of a bull call spread on any given day, the cash settlement amount of that short call must be paid to a holder exercising a like contract. This leaves the bull call spread holder with only a long call on the day after assignment, and with market risk that the value of that long call may decline before it can be sold or exercised.

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