Explore Your Options  |  MAR 2009

Explore Your Options by Tom Gentile

Explore Your Options by Tom Gentile TO CLOSE OR NOT TO CLOSE I have a put credit spread on a stock where the sold leg is out-of-the-money and the bought leg is deep in-the-money. I have already bought back the sold leg and the bought leg is left to be exercised. Should I let the buy leg be exercised and reap the profit or should I close it out before expiration? If you have a put credit spread, the trade was entered by selling a put and also buying a put with a lower strike price. Basically, selling the put credit spread is the same as selling a put, but another put with a lower strike is purchased as a hedge. Simply selling puts would expose the investor to more risk than trading the credit spread. The “credit” from the put credit spread comes from the fact that the option with the higher strike price has more premium than the put with a lower strike price. Puts with higher strike prices are worth more than puts with lower strike prices.

by Tom Gentile