Can I convert spread option into regular call or put?
Just so I'm clear- the end result is a long call, and you think the stock is going up. There is nothing wrong with that fundamentally.  Be aware though: That's a negative theta trade. This means if your stock doesn't increase in price during the remaining time to expiration of your call option, the option will lose some of its value every day. It may still lose some of its value every day, depending on how much the stock price increases. The value of the call option just goes down and down as it approaches maturity, even if the stock price stays about the same. Being long a call (or a put) is a tough way to make money in the options market.  I would suggest using an out-of-the-money butterfly spread. The potential returns are a bit less. However, this is a cheap positive theta trade so you avoid time decay on the value of the option. Yes. There are levels of option trading permission. For example, I've never set myself up for naked put writing.  But, if you already have the call spread, buying back the shorted call will leave you with a long call. This wouldn't be an issue. As long as you have the cash/margin to buy back that higher strike call.
"Great answer by @duffbeer. Only thing to add is that the option itself becomes a tradeable asset. Here's my go at filling out the answer from @duffbeer. ""Hey kid... So you have this brand-new video game Manic Mazes that you paid $50 for on Jan 1st that you want to sell two months from now"" ""Yes, Mr. Video Game Broker, but I want to lock in a price so I know how much to save for a new Tickle Me Elmo for my baby sister."" ""Ok, for $3, I'll sell you a 'Put' option so you can sell the game to me for $40 in two months."" Kid says ""Ok!"", sends $3 to Mr Game Broker who sends our kid a piece of paper saying: The holder of this piece of paper can sell the game Manic Mazes to Mr Game Broker for $40 on March 1st. .... One month later .... News comes out that Manic Mazes is full of bugs, and the price in the shops is heavily discounted to $30. Mr Options Trader realizes that our kid holds a contract written by Mr Game Broker which effectively allows our kid to sell the game at $10 over the price of the new game, so maybe about $15 over the price in the second-hand market (which he reckons might be about $25 on March 1st). He calls up our kid. ""Hey kid, you know that Put option that Mr Game Broker sold to you you a month ago, wanna sell it to me for $13?"" (He wants to get it a couple of bucks cheaper than his $15 fair valuation.) Kid thinks:  hmmm ... that would be a $10 net profit for me on that Put Option, but I wouldn't be able to sell the game for $40 next month, I'd likely only get something like $25 for it. So I would kind-of be getting $10 now rather than potentially getting $12 in a month. Note: The $12 is because there could be $15 from exercising the put option (selling for $40 a game worth only $25 in the second-hand market) minus the original cost of $3 for the Put option. Kid likes the idea and replies: ""Done!"". Next day kid sends the Put option contract to Mr Options Trader and receives $13 in return. Our kid bought the Put option and later sold it for a profit, and all of this happened before the option reached its expiry date." "The question is, how do I exit? I can't really sell the puts because there isn't   enough open interest in them now that they are so far out of the money. I have about $150K of funds outside of this position that I could use, but I'm   confused by the rules of exercising a put. Do I have to start shorting the stock? You certainly don't want to give your broker any instructions to short the stock! Shorting the stock at this point would actually be increasing your bet that the stock is going to go down more. Worse, a short position in the stock also puts you in a situation of unlimited risk on the stock's upside – a risk you avoided in the first place by using puts. The puts limited your potential loss to only your cost for the options. There is a scenario where a short position could come into play indirectly, if you aren't careful.  If your broker were to permit you to exercise your puts without you having first bought enough underlying shares, then yes, you would end up with a short position in the stock. I say ""permit you"" because most brokers don't allow clients to take on short positions unless they've applied and been approved for short positions in their account. In any case, since you are interested in closing out your position and taking your profit, exercising only and thus ending up with a resulting open short position in the underlying is not the right approach. It's not really a correct intermediate step, either. Rather, you have two typical ways out: Sell the puts.  @quantycuenta has pointed out in his answer that you should be able to sell for no less than the intrinsic value, although you may be leaving a small amount of time value on the table if you aren't careful.  My suggestion is to consider using limit orders and test various prices approaching the intrinsic value of the put.  Don't use market orders where you'll take any price offered, or you might be sorry. If you have multiple put contracts, you don't need to sell them all at once. With the kind of profit you're talking about, don't sweat paying a few extra transactions worth of commission. Exercise the puts.  Remember that at the other end of your long put position is one (or more) trader who wrote (created) the put contract in the first place. This trader is obligated to buy your stock from you at the contract price should you choose to exercise your option.  But, in order for you to fulfill your end of the contract when you choose to exercise, you're obligated to deliver the underlying shares in exchange for receiving the option strike price. So, you would first need to buy underlying shares sufficient to exercise at least one of the contracts.  Again, you don't need to do this all at once.  @PeterGum's answer has described an approach. (Note that you'll lose any remaining time value in the option if you choose to exercise.) Finally, I'll suggest that you ought to discuss the timing and apportioning of closing out your position with a qualified tax professional. There are tax implications and, being near the end of the year, there may be an opportunity* to shift some/all of the income into the following tax year to minimize and defer tax due. * Be careful if your options are near expiry!  Options typically expire on the 3rd Friday of the month." "Options have legitimate uses as a way of hedging a bet, but in the hands of anyone but an expert they're gambling, not investing. They are EXTREMELY volatile compared to normal stocks, and are one of the best ways to lose your shirt in the stock market yet invented. How options actually work is that you're negotiating a promise that, at some future date or range of dates, they will let you purchase some specific number of shares (call), or they will let you sell them that number of shares (put), at a price specified in the option contract. The price you pay (or are paid) to obtain that contract depends on what the option's seller thinks the stock is likely to be worth when it reaches that date. (Note that if you don't already own the shares needed to back up a put option, you're promising to pay whatever it takes to buy those shares so you can sell them at the agreed upon price.) Note that by definition you're betting directly against experts, as opposed to a normal investment where you're usually trying to ride along with the experts. You are claiming that you can predict the future value of the stock better than they can, and that you will make a profit (on the difference between the value locked in by the option and the actual value at that time) which exceeds the cost of purchasing the option in the first place.  Let me say that again: the option's price will have been set based on an expert's opinion of what the stock is likely to do in that time. If they think that it's really likely to be up $10 per share when the option comes due (really unlikely for a $20 stock!!!), they will try to charge you almost $10 per share to purchase the option at the current price. ""Almost"" because you're giving them a guaranteed profit now and assuming all the risk. If they're less sure it will go up that much, you'll pay less for the option -- but again, you're giving them hard money now and betting that you can predict the probabilities better than they can. Unless you have information that the experts don't have -- in which case you're probably committing insider trading -- this is a very hard bet to win. And it can be extremely misleading, since the price during the option period may cross back and forth over the ""enough that you'll make a profit"" line many times. Until you actually commit to exercising the option or not, that's all imaginary money which may vanish the next minute. Unless you are willing and able to invest pro-level resources in this, you'd probably get better odds in Atlantic City, and definitely get better odds in Las Vegas. If you don't see the sucker at the poker table, he's sitting in your seat. And betting against the guy who designed and is running the game is usually Not a Good Idea." I frequently do this on NADEX, selling out-of-the-money binary  calls. NADEX is highly illiquid, and the bid/ask is almost always from  the market maker. Out-of-the-money binary calls lose value quickly  (NADEX daily options exist for only ~21 hours). If I place an  above-ask order, it either gets filled quickly (within a few minutes)  due to a spike in the underlying, or not at all. I compensate by  changing my price hourly.  As Joe notes, one of Black-Scholes inputs is volatility, but price  determines (implied) volatility, so this is circular. In other words, you can  treat the bid/ask prices as bid/ask volatilities. This isn't as  far-fetched as it seems:  http://www.cmegroup.com/trading/fx/volatility-quoting-fx-options.html "Whether or not you make money here depends on whether you are buying or selling the option when you open your position.  You certainly would not make money in the scenario where you are buying options at the open.  If fact you would end up loosing quite a lot of money. You do not specify whether you are buying or selling the options, so let's assume that you are buying both the call and the put.  We'll look a profitable trade at the bottom of my answer. Buying an in-the-money Call option with a strike price of $90 when the underlying asset price is $150 would cost you a small fraction over $6000 = (100 x $60) since the intrinsic value value of the option is $60.  Add to this cost any commission charged by your broker. Buying an out-of-the-money Put option with a strike price of $110 when the underlying asset price is $150 would cost you a ""small"" premium - lets say a premium of something like $0.50.  The option has no intrinsic value, only time value and a volatility value, so the exact cost would depend on the time to expiry and the implied volatility of the underlying asset. Since the strike price is ""well out of the money"", being about 27% below the underlying asset price, the premium would be small.  So, assuming the premium of $0.50, you would pay $50 for the option plus any commission applicable. The cash settlement on expiry, with an underlying settlement price of $100, would be a premium of $10 for each of the two options, so you would receive cash of 100 x ($10 + $10) = $2000, less any commission applicable.  However, you have paid $6000 + $50 to purchase the options, so you realise a net loss of $6050 - $2000 = $4050 plus any commissions applicable. Thus, you would make a profit on the put option, but you would realise a very large loss on the call option. On the other hand, if you open your position by selling the call option and buying the put option, then you would make money. For the sale of the call option you would receive about $6000.  For the purchase of the put option you would pay about $50. On settlement, you would pay $1000 to buy back the call option and you would receive about $1000 when selling the put option. Thus you net profit would be about ($6000 - $1000) for the call position, and ($1000 - $50) for the put position.  The net profit would then total $5950 less an commissions payable." Yes, theoretically you can flip the shares you agreed to buy and make a profit, but you're banking on the market behaving in some very precise and potentially unlikely ways.  In practice it's very tricky for you to successfully navigate paying arbitrarily more for a stock than it's currently listed for, and selling it back again for enough to cover the difference.  Yes, the price could drop to $28, but it could just as easily drop to $27.73 (or further) and now you're hurting, before even taking into account the potentially hefty commissions involved. Another way to think about it is to recognize that an option transaction is a bet; the buyer is betting a small amount of money that a stock will move in the direction they expect, the seller is betting a large amount of money that the same stock will not.  One of you has to lose.  And unless you've some reason to be solidly confident in your predictive powers the loser, long term, is quite likely to be you. Now that said, it is possible (particularly when selling puts) to create win-win scenarios for yourself, where you're betting one direction, but you'd be perfectly happy with the alternative(s).   Here's an example.  Suppose, unrelated to the option chain, you've come to the conclusion that you'd be happy paying $28 for BBY.  It's currently (June 2011) at ~$31, so you can't buy it on the open market for a price you'd be happy with.  But you could sell a $28 put, promising to buy it at that price should someone want to sell it (presumably, because the price is now below $28). Either the put expires worthless and you pocket a few bucks and you're basically no worse off because the stock is still overpriced by your estimates, or the option is executed, and you receive 100 shares of BBY at a price you previously decided you were willing to pay.  Even if the list price is now lower, long term you expect the stock to be worth more than $28.  Conceptually, this makes selling a put very similar to being paid to place a limit order to buy the stock itself. Of course, you could be wrong in your estimate (too low, and you now have a position that might not become profitable; too high, and you never get in and instead just watch the stock gain in value), but that is not unique to options - if you're bad at estimating value (which is not to be confused with predicting price movement) you're doomed just about whatever you do. "Figured it out.  Vertical spreads significantly reduce the amount of ""buying power"" on the account needed vs. buying / selling pure calls / puts.  So even though the transaction fees may more double in some instances, it may be worth it in order to operate with pricier underlying instruments. Spreads are also considered ""defined risk"" trades where both the profit and loss are capped per how the spreads are setup.  This is compared to single calls / puts where either the upside or the downside can be unlimited.  So for times when the expected move is not as pronounced, a spread may be a better fit depending on environment and other factors." "A covered call risks the disparity between the purchase price and the potential forced or ""called"" sale price less the premium received. So buy a stock for $10.00 believing it will drop you or not rise above $14.00 for a given period of days. You sell a call for a $1.00 agreeing to sell your stock for $14.00 and your wrong...the stock rises and at 14.00 or above during the option period  the person who paid you the $1.00 premium gets the stock for a net effective price of $15.00. You have a gain of 5$. Your hypothecated loss is unlimited in that the stock could go to $1mil a share. That loss is an opportunity loss you still had a modest profit in actual $. The naked call is a different beast. you get the 1.00 in commission to sell a stock you don't own but must pay for that right. so lets say you net .75 in commission per share after your sell the option. as long as the stock trades below $14.00 during the period of the option you sold your golden. It rises above the strike price you must now buy that stock at market to fill the order when the counter party choses to exercise the option which results in a REAL loss of 100% of the stocks market price less the .75 a share you made.   in the scenarios a 1000 shares that for up $30.00 a share over the strike price make you $5,000 in a covered call and lose you $29,250 in a naked call.Naked calls are speculative. Covered calls are strategic." On expiry, with the underlying share price at $46, we have : You ask :  How come they substract 600-100. Why ? Because you have sold the $45 call to open you position, you must now buy it back to close your position.  This will cost you $100, so you are debited for $100 and this debit is being represented as a negative (subtracted); i.e., -$100 Because you have purchased the $40 call to open your position, you must now sell it to close your position.  Upon selling this option you will receive $600, so you are credited with $600 and this credit is represented as a positive (added) ; i.e., +$600. Therefore, upon settlement, closing your position will get you $600-$100 = $500.  This is the first point you are questioning.   (However, you should also note that this is the value of the spread at settlement and it does not include the costs of opening the spread position, which are given as $200, so you net profit is $500-$200 = $300.) You then comment :  I know I am selling 45 Call that means : As a writer: I want stock price to go down or stay at strike. As a buyer: I want stock price to go up. Here, note that for every penny that the underlying share price rises above $45, the money you will pay to buy back your short $45 call option will be offset by the money you will receive by selling the long $40 call option.  Your $40 call option is covering the losses on your short $45 call option. No matter how high the underlying price settles above $45, you will receive the same $500 net credit on settlement.  For example, if the underlying price settles at $50, then you will receive a credit of $1000 for selling your $40 call, but you will incur a debit of $500 against for buying back your short $45 call.  The net being $500 = $1000-$500.  This point is made in response to your comments posted under Dr. Jones answer. "You could buy options. I do not know what your time horizon is but it makes all the difference due to theta burn. There are weekly, monthly, quarterly, yearly and even longer duration options called leaps. You have decided how long of a time frame. You also have to see what the implied volatility is for the underlying because if you think hypothetically that the price of the spy is 100 dollars currently. Today is hypothetically a Thursday and you buy a weekly option expiring on Friday ( the next day) of strike 100.5 and the call option is priced at .55 cents and you buy it. This means that the underlying has to move .5 dollars in one day to be considered in the money but at time 0, the option should only be worth its intrinsic value which is the underlying, (Say the SPY moved 55 cents up from 100 to 100.55), (100.55) minus the strike (100.5) = 5 cents, so if you payed 55 cents and one day later at expiration its worth 5 cents ,you lost almost 91% of your money, rather with buying and holding you lose a lot less. The leverage is on a 10x scale typically. That is why timing is so important. Anyone can say x stock is going to go up in the future, but if you know ****when**** you can make a killing if it is not already priced into the market. Another thing you can do is figure out how much MSFT contributes to the SPX movement in terms of points. What does a 1% move in MSFT doto SPX. If you can calculate that and you think you know where MSFT is going, you can just trade the spy options synthetically as if it were microsoft. You could also buy msft stock on margin as a retail investor, but be careful. Like Rhaskett said, look into an etf that has microsoft. The nasdaq has a nasdaq-100 which microsoft is in called the triple Q. The ticker is qqq. PowerShares QQQ™, formerly known as ""QQQ"" or the ""NASDAQ- 100 Index Tracking Stock®"", is an exchange-traded fund based on the Nasdaq-100 Index®. Best of luck and always understand what you are buying before you buy it, JL" An option, by definition, is a guess about the future value of the stock. If you guess too aggressively, you lose the purchase price of the option; if you guess too conservatively, you may not take the option or may not gain as much as you might have. You need to figure out what you expect to happen, and how confident you are about it, against the cost of taking the option -- and be reasonably confident that the change in the stock's value will be at least large enough to cover the cost of buying into the game. Opinion: Unless you're comfortable with expectation values and bell curves around them, it's significantly easier to lose money on options than to profit on them. And I'm not convinced that even statisticians can really do this well. I've always been told that the best use for options is hedging an investment you've already made; treating them as your primary bet is gambling, not investment. "Number 2 cannot occur. You can buy the call back and sell the stock, but the broker won't force that #2 choice. To trade options, you must have a margin account. No matter how high the stock goes, once ""in the money"" the option isn't going to rise faster, so your margin % is not an issue.  And your example is a bit troublesome to me. Why would a $120 strike call spike to $22 with only a month left? You've made the full $20 on the stock rise and given up any gain after that. That's all. The call owner may exercise at any time. Edit: @jaydles is right, there are circumstances where an option price can increase faster than the stock price. Options pricing generally follows the Black-Scholes model. Since the OP gave us the current stock price, option strike price, and time to expiration, and we know the risk free rate is <1%, you can use the calculator to change volatility. The number two scenario won't occur, however, because a covered call has no risk to the broker, they won't force you to buy the option back, and the option buyer has no motive to exercise it as the entire option value is time premium." you can try CME DataSuite. Your broker gives you real time options quotes. If you do not have one you can open a scottrade account with just $500 deposit. When I moved my money from scottrade to ameritrade they did not close my account even till this day I can access my scottrade account and see real time quotes and the same research they offered me before. You can try withdrawing your deposit and see if it stays open like mine did. "No.  The more legs you add onto your trade, the more commissions you will pay entering and exiting the trade and the more opportunity for slippage.  So lets head the other direction.   Can we make a simple, risk-free option trade, with as few legs as possible? The (not really) surprising answer is ""yes"", but there is no free lunch, as you will see.  According to financial theory any riskless position will earn the risk free rate, which right now is almost nothing, nada, 0%.   Let's test this out with a little example. In theory, a riskless position can be constructed from buying a stock, selling a call option, and buying a put option.  This combination should earn the risk free rate. Selling the call option means you get money now but agree to let someone else have the stock at an agreed contract price if the price goes up.  Buying the put option means you pay money now but can sell the stock to someone at a pre-agreed contract price if you want to do so, which would only be when the price declines below the contract price.  To start our risk free trade, buy Google stock, GOOG, at the Oct 3 Close:   495.52 x 100sh = $49,552 The example has 100 shares for compatibility with the options contracts which require 100 share blocks. we will sell a call and buy a put @ contract price of $500 for Jan 19,2013.   Therefore we will receive $50,000 for certain on Jan 19,2013, unless the options clearing system fails, because of say, global financial collapse, or war with Aztec spacecraft. According to google finance, if we had sold a call today at the close we would receive the bid, which is 89.00/share, or $8,900 total.  And if we had bought a put today at the close we would pay the ask, which is 91.90/share, or $9190 total. So, to receive $50,000 for certain on Jan 19,2013 we could pay $49,552 for the GOOG stock, minus $8,900 for the money we received selling the call option, plus a payment of $9190 for the put option we need to protect the value.  The total is $49,842.   If we pay $49,842 today, plus execute the option strategy shown, we would have $50,000 on Jan 19,2013.  This is a profit of $158, the options commissions are going to be around $20-$30, so in total the profit is around $120 after commissions.   On the other hand, ~$50,000 in a bank CD for 12 months at 1.1% will yield $550 in similarly risk-free interest.   Given that it is difficult to actually make these trades simultaneously, in practice, with the prices jumping all around, I would say if you really want a low risk option trade then a bank CD looks like the safer bet.  This isn't to say you can't find another combination of stock and contract price that does better than a bank CD -- but I doubt it will ever be better by very much and still difficult to monitor and align the trades in practice." To Chris' comment, find out if the assignment commission is the same as the commission for an executed trade. If that does affect the profit, just let it expire.  I've had spreads (buy a call, sell a higher strike call, same dates) so deep in the money, I just made sense to let both exercise at expiration. Don't panic if all legs ofthe trade don't show until Sunday or even Monday morning.