I’ve been thinking about opening a wide bullish debit spread on SPY with a two month time to expiry.
I’m currently looking at the March 20th calls and am thinking of selling the $425 call while buying the $359 call. This will cost me $5 per contract and that’s fine because I have a small account and would rather not play with more than 3% of my portfolio at a time.
I made the decision to go with a wide spread, in case of the one in a million chance that SPY breaks $425 by March 20th (very highly doubt it, 99.99999% sure it won’t even come close). This is because I believe the maximum profit for a debit spread is the width of the spread, minus any debit paid, multiplied by 100. This means with a spread width of $66 and a debit paid of $5, my max profit is $6595 and is achieved if SPY is above $425 at expiry (correct me if I’m wrong here please).
However, my primary goal with the spread is to wait as SPY creeps towards $359 and take profits around the middle of March when the price is around $345 and the bid/ask spread has widened (if it moves as it has over the previous two years).
But this leaves me with a question; if I create the $359/$425 debit spread, can I sell my long leg (the $359 calls) for profit, and then decrease the width of the spread (to re-cover the short leg) to say the $420 calls?
What is the impact of doing something like that? What are potential gotchas that could occur?
NOTE: I’m not talking hundreds of contracts here either, between 1 and 5 max with my goal being to make between $20 and $100 profit.