When to lock in max profit in Bull spread option

Buying a call spread is a great way to not only define risk but to also reduce the overall cost of the trade.

Let’s assume I bought a 120/130 call spread and I paid 3.00 for the spread. My Max Risk in the trade is what I paid for it or $300. My Max Reward in the trade is the difference between strikes minus what I paid for the spread or $700 ($1000-$300).

Here’s what Risk Profile of a long call spread with 33 days until expiration looks like:

As we can see, the Max Reward is only achieved at expiration when there’s no extrinsic value (time premium) left in the trade.

As far as risk goes, there’s a very small chance that a short 130 call may be assigned. If this was to happen before expiration, the long 120 call would cover the short position after the assignment.

The chance of early assignment is very small because a call owner would be giving up all of the time premium left in the option. Another reason this would be unlikely with high priced stocks is that the call owner would have to come up with a significant amount of capital to take delivery of the shares. Think about someone exercising their right to own 100 shares of GOOGL (Google trading at 1516) and having to come up with $151,600 just to take delivery. It is more advantageous for them to just sell the call unless they specifically want to own the stock. The only reason someone would exercise their right early and take delivery of the stock is if there was a dividend that they wanted to capture and needed to be the owner of the record before the ex-dividend date.