Homework: Today we will talk about how to close out a bad bull call spread.

In our previous example we covered XTO with a buy of the April $30 call and a sell of the April $35.00 call. If the stock closes above the $35.00 strike price on the April expiration day then no follow up action will be required, however if the stock closes under $35.00 then we may need to adjust the trade.

To turn the trade into a bearish trade you will need to go through a couple of steps.

First you must be sure that the stock is going to head much lower and not just move slightly lower.
     If it is only a slightly lower move then you will need to follow Monday's exercise.

Suppose in our example XTO receives some bad news and the stock breaks through the $31.00 support on 3 red arrows and heavy selling. You now believe it will continue lower so you want to reverse the bullish trade into a bearish trade.

Step one is to close out the short leg of the trade and Buy to Close the April $35.00 call you sold. This will be at a reduced price as time as evaporated part of the premium as well as the stock will have dropped in price.

Step two will be to Sell to Open the April $25.00 calls. This will bring in cash into your account leaving you will a net credit in your account. This second step might require some follow up action however as you have just sold someone the right to buy XTO from you at $25.00. If the stock closes under $25.00 on expiration day you will be fine with no follow up action required. If however, the stock closes between $25.00 and $30.00 you will want to Buy to Close the April $25.00 call prior to 4:00pm Eastern on expiration day.  

To see the original XTO spread and a current stocks to watch list please click here