Question About Options Trading Strategy – Different Scenarios of a RUT Bear Call Credit Spread Option Expiring in-the-money (ITM) or out-of-the-money (OTM)

Question:  Hypothetically, for a credit spread options trading strategy,  if the RUT climbs and closes at 845 on Thursday, Feb 17th, the day that it ceases to trade, and then opens at 839 on expiration Friday, Feb 18th, did our RUT Feb 840/850 bear call credit spread option expire in-the-money (ITM)? 

Answer:  Any time prior to Thursday, Feb 17th when the RUT ceases to trade after the close of the market, if the RUT climbs over 840 the short 840 Call has gone ITM, and we never want to get to this point.  We would adjust the RUT Feb 840/850 bear call spread when the RUT touches 837 or so.  

Specifically answering your question, if the RUT settles at 839 on Friday, your short 840 call expired OTM and you keep 100% of the premium that you collected when you first opened the RUT Feb 840/850 bear call spread.  If the RUT settles at 843 on expiration Friday, your short 840 call expired $3 ITM and $300 per spread that you are holding would be debited from of your account.  If the RUT settles at 847 on expiration Friday, your short 840 call expired $7 ITM and $700 per spread that you are holding would be debited from of your account.  Using a final example, if the RUT settles at 856 on expiration Friday, your short 840 call expired $16 ITM, but only $1000 per spread that you are holding would be debited from of your account because the long 850 Call helped to limit your loss to $1000.  The settlement value is different from the “opening value of the RUT” on Friday morning of expiration.  It’s important to understand how the settlement value is calculated.  For more on the settlement process please visit the FAQ page at http://www.monthlycashthruoptions.com/FAQ.htm and read entries #24 and #25.

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