Credit spreads are a special way of trading options. They involve selling one option and buying another option with different prices, but they both end at the same time. People use credit spreads to make money, manage risks, or guess what might happen in the future. One question people ask is whether it’s safe to just let the options expire without doing anything. We’ll talk about this idea and look at the possible good and bad things that could happen.

Credit spreads usually have two options: a short one and a long one. The short one is sold to get some money right away, and the long one is bought to protect against losing money. The money you get from selling the short option is the most you can make from the credit spread, and the difference in prices between the short and long options is the most you could lose.

One way to deal with credit spreads is to let them expire without doing anything. That means both options just go away on their own, without anyone doing anything. The money you got from selling the short option would be all yours as profit. This is called “letting the credit spread expire.”

Reasons Why It Is Safe To Let Them Expire

1. You know how much you might lose: With credit spreads, you know the most you could lose from the beginning. If you let the credit spread expire, you won’t lose more than that, so you can plan for it.
2. You don’t have to do anything else: If you let the credit spread expire, you don’t have to worry about doing anything else. You don’t have to buy or sell anything else, and you can just keep the money you got from selling the short option.
3. You might make more money: Sometimes, as time goes by, options lose value. This can be good for the person who sold the options, because they get to keep more of the money they got from selling the short option. If you let the credit spread expire, you might get to keep all of it.
4. You might be right about what happens: When you sell options, you’re guessing what might happen in the future. If you’re right and nothing happens, you might get to keep all of the money you got from selling the short option without doing anything else.

Why Letting Them Expire Is Not The Best Idea

1. Sometimes things change quickly: If things change and the options end up being worth more than you thought, you might lose money. Even though you know the most you could lose, it could still be a lot of money.
2. You might miss out on other opportunities: If you let the credit spread expire, you might not get a chance to make some money if things change. Sometimes it might be better to take some money early instead of risking losing it all by waiting.

The Nightmare Scenario (And How To Protect Yourself)

There is a video on YouTube that shows someone experiencing a $30k loss from letting their credit spread expire. This video is often used as a reason to not let your credit spreads expire. The case mentioned in the video is very very rare and almost never happens. Regardless, I’m going to explain why it happened and how to prevent it.

You can realize an insanely large loss on your credit spreads if the stock closes between your two strike prices for your credit spread on expiration day. This is because the short strike option requires you to sell 100 shares (if a put contract) while the bought strike option expired worthless at market close. This means you are responsible for giving them 100 shares without any downside protection available. This is why I call it the Nightmare Scenario.

You can easily prevent this by closing out your credit spread trade if the stock looks like it will close in between the two strike prices. Exiting early allows you to book a profit (if the stock is currently above the short strike for put credit spreads) and prevent the Nightmare Scenario. So, long story short, credit spreads can be dangerous, but if in doubt, exit your position early. That’s exactly what I teach in the Credit Spreads Inner Circle program.

In conclusion, letting credit spreads expire can be a safe strategy if you understand the risks and benefits. It’s important to know how much you might lose, what other opportunities you might miss, and what could happen if things change quickly. It’s a good idea to talk to a financial professional or someone who knows about options before making any decisions.

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer