Exiting A Profitable Long Spread Early

09/05/2008 12:00 am EST

Focus: OPTIONS

John Jagerson

Co-Founder and Contributor, LearningMarkets.com

Yesterday I demonstrated how to enter a long put spread on GOOG. The most common question I get back from readers about vertical spreads is how and when to get out. Traders frequently assume that they cannot exit a spread early but that is not true. In fact, like most other trades if your analysis changes, you can exit a position for its current gain or loss at your convenience anytime before expiration. 

In today's video I will show you how a long put spread can be exited on GOOG early if the position is profitable. The process consists of reversing the original trade. In this case that means that you are closing the long put by selling the 490 strike price and closing the short position by buying the 480 strike price.

When closing a trade like this you will be paid a credit. In today's example, that credit is larger than the original debit or cost of the spread. The difference between what I paid for the option spread and what I am paid for it at exit is the profit on the position.

Watch the video now:

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