What do you hold if you close one leg of a spread first?

Each leg has a job

A vertical credit spread is two legs on the same expiration, and they do opposite jobs. The short leg collects the premium. The long leg, bought further out of the money, caps the loss the short leg could otherwise run up: on a bull put spread the long put stops it below its strike, on a bear call spread the long call stops it above. Take either leg away and the other stands alone, with the risk of a single option rather than that of the spread.

Which leg goes first decides what is left

Closing a spread one leg at a time leaves a single option open between the two fills. Buy back the short leg first and you hold the long option, which can lose only what it is still worth. Sell the long leg first and you hold a naked short option: on the put side the loss can run until the share price reaches zero, on the call side it has no limit. At that moment the margin requirement also jumps to the figure for a naked option.

Legging in versus one combination order

Opening works the same way in reverse. A combination order prices both legs as one net amount, so they are filled together or not at all. Legging in means one leg fills before the other, and until the second fill the account carries that leg alone: a naked short put or call if the short leg went first, a long option that can lose its premium if the long leg did. Whether a combination order fills, and at what net price, still depends on the market.

The common misreading

A nearly worthless long leg looks like money left on the table, so it gets sold for its last few cents while the short leg stays open. Those cents are the price of the cap. Once the long leg is gone, a short put can lose until the share price reaches zero and a short call without limit, in exchange for a euro or two per contract. Closing the short leg first, or both legs together, keeps the loss limited the whole way out.

Worked example

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

An example bull put spread at a share price of 100 €: sell the 95 € put for 2.00 € and buy the 90 € put for 0.50 €, a 1.50 € net credit. With both legs, the multi-leg break-even calculator shows 150 € maximum profit, 350 € maximum loss and a 93.50 € break-even. The short put alone shows 9,300 € marked “Unlimited downside risk”, a loss that runs until the share price reaches zero; the long put alone can lose its 50 €.

A week before expiration, still at 100 € and 30 % implied volatility, the model (lognormal, r = 0) values the 95 € put at about 0.21 € and the 90 € put at about 0.01 €. Closing both costs about 20 € and keeps about 130 €. Selling the long put first brings in about 1 € and leaves the 95 € put naked; buying back the short put first costs about 21 € and leaves a 90 € put that can lose only its last 1 €. Fees are ignored.

Strategies where the term matters

• Short Iron Condor — Is the range you expect genuinely narrower than the move the market has priced in?
• Bull Put Spread — Do you want a credit against an obligation - or would you rather pay a debit?
• Long Call Diagonal — Does the upper strike sit above the lower strike plus the debit you paid?

Calculators for this term

• Multi-Leg Break-Even Calculator
• Credit Spread Calculator

Track it in your journal

• Options trading journal for spreads and multi-leg strategies

Related terms

• Credit spread
• Max loss
• Margin requirement

Every term in one place: the options glossary.