Between Strikes

SPX Index is between 1400 and 1405 at expiration



Buy 1 SPX 1400/1405 Call Spread at $2.75 Debit


 
With the SPX exercise settlement value between the two strike prices of $1400 and $1405 at expiration, the short SPX 1405 call would expire out-of-the-money and with no value, but the long 1400 call would be in-the-money and worth its cash settlement amount. With SPX above the break-even point of 1402.75, the settlement amount received for the 1400 call would exceed the total debit initially paid for the spread and the investor would see a partial profit.

As an example, the OEX exercise settlement value is 1404. The call’s cash settlement amount would be:

1404 (settlement value) – 1400 (call strike price) = $4 x $100 = $400

The investor’s partial profit would be:

$400 cash settlement amount received at call’s exercise
- $275 total debit initially paid for spread
$125 profit

On the other hand, if SPX settles below the break-even point (but above the lower 1400 strike) the cash settlement amount will be less than the debit paid for the spread and a partial loss would be realized.

For instance, say the OEX exercise settlement value is 1401. The call’s cash settlement amount would be:

1401 (settlement value) – 1400 (call strike price) = $1 x $100 = $100

The investor’s partial loss would be:

$275 total debit initially paid for spread
- $100 cash settlement amount received at call’s exercise
$175 loss

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