debit spread
I asked my broker this question today, and he is totally confused.

I have a debit spread.  I am long ABC March 26 calls, and short ABC February 27 calls.

I brought in .58, but the short is now at 2.45 as the stock has soared through my strike price of 27.  I paid 5.25 for my long and it is now at 4.00 (down by 1.25)  If expiration were TODAY, how much would I stand to lose?

Can you help?
La Nedra

Hello La Nedra,

I need a bit more information.  What is the price of the Fe 27 call?  The fact that the stock 'soared' above 27 doesn't tell me that.

But before getting that far:

Did you pay $5.25 for the March 26 call and sell the Feb 27 call @ $0.58?  I think that's what you are saying. 
If that's true this is a bad situation.

Here is what you would lose:
The sum of the loss in your March call (and that's $125 per option)
PLUS the cost to buy the Feb 27 call, minus $0.58.

I don't see how it's possible to lose money on this bullish spread - unless you paid far too much for the March calls.  For this spread to lose like this would require that the implied volatility of the options to have taken a big hit.  In other words, option prices declined.  The calls did not move as high as they should have moved and the put prices got crushed.

If your broker is confused, that's a very bad thing.  He is being paid to provide help.

If this does not answer the question, please write again.


Mark D Wolfinger