From this website -
Bull Put Spread Example
An options trader believes that XYZ stock trading at $43 is going to rally soon and enters a bull put spread by buying a JUL 40 put for $100 and writing a JUL 45 put for $300. Thus, the trader receives a net credit of $200 when entering the spread position.The stock price of XYZ begins to rise and closes at $46 on expiration date. Both options expire worthless and the options trader keeps the entire credit of $200 as profit, which is also the maximum profit possible.
If the price of XYZ had declined to $38 instead, both options expire in-the-money with the JUL 40 call having an intrinsic value of $200 and the JUL 45 call having an intrinsic value of $700. This means that the spread is now worth $500 at expiration. Since the trader had received a credit of $200 when he entered the spread, his net loss comes to $300. This is also his maximum possible loss.
I have one question -
When the price of the XYZ declined to $38 and both options expire in the money.
Does the trader need to actively SELL the JUL 40 put, to close the position out?
It doesn't state that here explicitly.
I am wondering because this is executed as a multi-leg option (i.e. in text in the beginning… buying of 1 and selling of 1 PUT option to construct a PUT spread)
do we need to close out each leg separately?
Also I am wondering is - are there cases where the broker takes care of closing out the positions in the event the client forgets to?
Also note : in that same paragraph there are references to CALL when I think they mean PUT.
Thanks
If you do not want to have to exercise the put option, then yes you must close out before 4:20pm of the expiry date. Note that if you try to close it between 3:45pm-4:20pm on expiry then the market makers know what you're up to and will screw you on the spread, likely adding $0.10 to the close-out price.
Yes. This can be done with a combo trade, if your broker has this function, where both legs are closed with the same market maker in a semi-off market clearing house and instead of paying two spreads you only pay one. You still pay two brokerage fees and ASX fees though.
No. If you forget to close ITM options before 4:20pm on expiry date then you have no choice but to exercise the option and extract your value that way. Or in the case of writing, all options at least $0.01 ITM will be exercised by the holder against you. The way exercising works is that by 7pm on the day of expiry all option holders must formally notified the option writer if they want to go ahead with exercising their right (if options you hold expire OTM then there is no point in exercising the option so you don't make any formal notification). The option writer has 24 hours to comply with exercising. If the option writer does not hold the underlying (like in your example) then the underlying must be bought/sold at 10:00am the following morning in order to comply with the option exercising. The broker will handle all of this for you, but they will charge you brokerage on all legs at the full underlying value so you pay huge brokerage fees. There is no incentive for brokers to 'automatically' close options for you at 3:45pm on expiry date. Also you take on the risk of the underlying moving from 4:00pm on the day of expiry to 10:00am the day after (this could be in your favour or it could be against you)