When is an almost-worthless position still worth closing?

Holding on is a trade of its own

In the last days a credit spread far from its short strike is worth only a few cents. Holding it from there no longer earns the credit you opened it for; that is mostly banked. What remains is a new bet: the last few cents to gain against the full width minus those cents to lose. The credit spread calculator shows that bet if you enter the spread’s current price, short leg less long leg, as the credit.

Low odds, large amount

Far from the strike the chance of the short leg finishing in the money is low, which is why the spread is cheap. Low is not zero. The probability-of-profit calculator, set to the short put or short call with the days left, shows how the odds change with distance and time. Most in-the-money finishes lose less than the maximum, yet one that ends well past the break-even costs many times the cents at stake. Buying back the short leg and selling the long leg together ends that bet at the spread’s current price.

For a long option the question turns round

A long option that is nearly worthless can lose only its last cents, so letting it expire costs little; selling it is worth it only if those cents exceed the fee for the closing fill, a point the trading-costs page covers. In the money the question changes. A stock option left to expire in the money is normally exercised automatically, under rules that differ by broker. On a call the account then needs the cash for 100 shares per contract; on a put it delivers 100 shares, which leaves a short share position if it holds none. Selling the option before the close takes its value without either.

The common misreading

An almost-worthless spread seems to have nothing left to lose: the profit looks banked, and closing would only give back a few cents. Those cents are what is left to gain. What is left to lose is almost the whole width, on a put spread if the stock falls through the short strike, on a call spread if it rises through it. Low odds make that outcome rare, not small. Holding on is a choice to make on purpose, not one to leave to the calendar.

Worked example

Hypothetical numbers for illustration, not a market quote and not a recommendation.

An example bull put spread, short 95 € put and long 90 € put for a 1.50 € credit, has five days left with the stock at 100 € and implied volatility at 30 %. As model values (lognormal, r = 0), the 95 € put is worth about 0.11 € with roughly a 7.5 % chance of finishing in the money, about 1 in 13, and the 90 € put about 0.00 €. Buying back the short put for 0.11 € and letting the worthless long put go keeps 139 €.

Holding is the trade the credit spread calculator shows for a 0.11 € credit: 11 € maximum profit, 489 € maximum loss, break-even at 94.89 €. Most in-the-money finishes lose less than 489 €, which needs a close at or below 90 €. The call side mirrors: a 105/110 € bear call spread with five days left is worth about 0.13 €, and the 105 € call has roughly an 8 % chance of finishing in the money. Fees are ignored.

Strategies where the term matters

• Bull Put Spread — Do you want a credit against an obligation - or would you rather pay a debit?
• Covered Call — Are you willing to hand over the shares at the call strike - even if they keep running afterwards?
• Short Iron Condor — Is the range you expect genuinely narrower than the move the market has priced in?

Calculators for this term

• Credit Spread Calculator
• Probability of Profit Calculator

Track it in your journal

• Options trading journal for spreads and multi-leg strategies

Related terms

• Expiration
• Pin risk
• Max profit

Every term in one place: the options glossary.