# At or Below Lower Strike

## OEX Index is at or below lower strike price of 595 at expiration

If the OEX exercise settlement value is exactly at the lower strike price of 595 at expiration, the short 595 put will be at-the-money and expire with no value.

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

600 (put strike price) – 595 (settlement value) = \$5 x \$100 = \$500

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

\$500 cash settlement amount received at puts’s exercise
- \$235 total debit initially paid for put spread
\$265 profit

If the OEX exercise settlement value is below the lower strike price of 595, then the investor could expect assignment on the short 595 put and have to pay its cash settlement amount. However, the investor would exercise the 600 put and receive its cash settlement amount, which would always be more than 595 put’s by \$500 (difference in strikes of \$5 x \$100 multiplier).

As an example, say the exercise settlement value of the OEX index is 593.

\$700 settlement amount received at 600 put’s exercise (\$7 intrinsic value x \$100)
- \$200 settlement amount paid at 595 put’s assignment (\$2 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
- \$235 total debit initially paid for spread
\$265 profit

On the other hand, if the OEX 600/595 put spread is sold for its intrinsic value as the market settles at 593 on the option’s last trading day, the premium received would be:

\$7 intrinsic value of 600 put (\$600 strike price – 593 OEX level)
- \$2 intrinsic value of 595 call (\$595 strike price – 593 OEX level)

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

- \$235 total debit initially paid for spread
\$265 profit

This profit of \$265 represents a return on an initial investment of \$235 total premium paid for the put spread of approximately 112.8% over the 2-month life of the spread.

NOTE: If at any point before expiration the investor feels confident that the long put will expire in-the-money and the short put out-of-the-money, and wants to sell the long put realize a profit or cut a loss, the entire spread should be closed out. Selling only the long put would leave the investor with an uncovered short index put position that has unlimited risk as well a margin requirement, even if the put 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 put is in-the-money with little time value remaining. If an investor is assigned early on the short put side of a bear put spread on any given day, the cash settlement amount of that short put must be paid to a holder exercising a like contract. This leaves the bear put spread holder with only a long put on the day after assignment, and with market risk that the value of that long put may decline before it can be sold or exercised.

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