I've mentioned it multiple times over the past 2 years in this thread -- spreads are extremely dangerous, especially if both legs go ITM.
The important word here is leverage. Spreads are highly leveraged. If you use the long leg to limit your loss while being able to outright take full asignment from the short leg, its fine. If you use the long leg to maximize your leverage, its not fine.
Thanks for the responses. Still trying to understand.
Spread is purely to hedge and not to leverage. I'd be selling as many spreads as I'd with covered calls / cash covered puts.
Just to give more background - here is the scenario. Lets say I've 100 TSLA shares and no cash in the account. What I'm trying to decide is which is less risky. Let us assume SP is like it is now (182.86).
A. Sell 1 C200 Expiring 12/2 for $1.16 Cr.
B. Sell 1 C200 / Buy 1 C205 (i.e. bear credit spread) Expiring 12/2 for $0.47 Cr.
Let us say SP goes to 220 on 12/2. Now the choices are
A1. Roll C200 12/2 to C200 12/9 (for a small Cr). I don't think it would be possible to roll for even/credit to anything higher like C202.5. I know this because I've been doing this recently but on the Cash Covered Put side.
B2. Roll -200/+205 12/2 to -212.5/+220 12/9 for a small Cr / even. If not possible roll to -210/+220 for a small Cr.
To get an idea how B2 might work, I just looked at the similar ITM calls at close from yesterday (11/25) - SP at 182.86 for calls expiring 12/2. Assuming I've to pay $5 to close the 12/2 spread.
-C172.5/+C182.5 : 12.72 - 6.41 = Cr 6.31
-C175/+C182.5 : 11:00 - 6.41 = Cr 4.39
So, looks like I can do this roll - but not with a $5 spread but at $7.5 or $10.
But, I've essentially rolled my short call from C200 to C210 .... which would not have been possible but for the hedging long call that I bought.
C162.5 : 20.85
C165 : 18.87
One more thing - I expect if the SP shoots up, the IV will shoot up as well. I'll have to dust off my trusty old Black-Scholes spreadsheet to do the analysis in that case. I'll do that over the next couple of days and post. Will also check if Fidelity would do the back testing automatically for me.
ps : Just to take this a step further, let us say the SP jumped all the way to 320. My 12/2 spread is still worth only $5. So, I'd able able to roll to -C310/+C320 ! So, by using the spread instead of covered calls, I'd able to save the stock that has now appreciated 60%.