Can You Close Down 1 Leg In a Vertical Spread?
A few days ago, I received a question about vertical spread and it is basically about if you can close down one leg of it.
The short answer is yes, you can. You technically can close down one leg of this strategy at any point in time after getting filled.
Closing down 1 leg of this would mean that either the long leg or short leg will be eliminated.
If you close down the short leg, aka buying it back, the long leg will remain and now act as a straight option.
It will be more exposed time decay and implied volatility fluctuation.
Your broker won’t be mad and trying to stop you having just that long leg remain because that your money on the line and he doesn’t have to margin a long position.
However, if you decide to close down the long leg, aka selling it, all you have left in the account for that trade is a naked short position.
Unless, you are a seasoned trader or LTCM, it is highly NOT recommended because selling naked options could lose you far more money than you put up in the first place.
Furthermore, if you haven’t got approval and put up some considerable amount of margin with your broker, he won’t let you do it. Why would he risk losing this shirt?
I actually cannot find any reason you should close down one leg in the middle of the game. Just close down the entire trade and re-visit your market outlook and place a brand-new trade.
Agree or Disagree? Pls share your thoughts with your fellow traders.
Category: Vertical Spreads
