Exiting Debit Spreads
When a debit spread trade is entered, you are spending money to enter into that trade. The money spent is the net amount of the trade based on buying a call or put contract at one strike price, and then selling a call or put contract at another strike price. The option contract that you buy is going to cost more than the option contract that you sold, so the net effect is a cost to you. However, the cost to buy the option contract has been offset or reduced by selling an option contract.
In a debit spread trade, the amount of money spent to enter the trade is the maximum amount that you can lose. You will lose that maximum amount if both options in the trade expire worthless. Ideally for a debit spread trade, the maximum gain can be achieved if both options are in the money at expiration. The options will be assigned and you end up with your maximum gain.
You can close out of a spread trade at any time up until expiration. You can close out if you have a net profit on your trade. However, if you haven’t reached your maximum gain, you may choose to stay longer, especially if your options are already in the money or if it looks likely that they will end up in the money by expiration.
If your debit spread trade is showing a loss, you can exit at any time until expiration. If both options are in the money, or you expect them to be in the money at expiration, do not worry if your net positions show a loss. This can happen with spread trades, which initially causes worry for new spread traders. Even if the trade shows a loss, focus on whether or not the options will be in the money at expiration.
If the options are out of the money and you think they will end that way at expiration, then consider closing the trade. However, if your net loss shows greater than the amount you spent to enter the trade, let the trade expire worthless. You will not lose more than the amount spent to enter the trade.
If one option is in the money and one is out of the money as you approach expiration, you will want to close the trade before the options expire. That still may end up as a profitable trade.
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