If the market remains steady, the investor may choose to do nothing and let time decay take its course, resulting in the short call expiring worthless. The investor can then close out the long call or perhaps hold on to it if expectations are now bullish. Holding the call converts the strategy to a simple taken option position, with the attendant risks and rewards.
If the stock falls unexpectedly, the investor may choose to close the spread before the long call loses all time value. Otherwise, the position could be left in the hope that the market recovers and the long call improves in value.
In the event of a market rise, the investor must decide whether to close out the spread to avoid exercise or maintain it in the hope that the market retreats and time decay can take effect.
- Take advantage of time decay by entering the spread around six weeks before expiry of the near-term option.
- Be wary of leaving the taken call open after expiry of the sold option. If this is the case then the position becomes a different strategy.