Can we close the "call debit spread" option once the maximum gain is reached long before the expiration date? I do not see a point on why we should wait until the expiration day where we might run into the risk of stock price going down again.
I feel this same way. Why risk losing the money!
The call debit spread reaches its maximum gain only at expiry when the underlying price is greater than or equal to the strike price of the sold options. Let’s look at below scenarios to understand this.
Scenario 1:
30 days to expiry
Underlying price $ 90
Long 100 strike call option is $ 2
Short 110 strike call option is $ 1
The net premium paid to enter call spread is $ 1
Scenario 2:
30 days to expiry
Underlying price $ 110 (increases by $20)
Long 100 strike call option is $ 9
Short 110 strike call option is $ 4
The net premium received on closing the call spread is $ 5
Scenario 3:
At Expiry (Days to expiry reduced by 30 days)
Underlying price $ 110 (No change)
Long 100 strike call option is $ 10
Short 110 strike call option is $ 0
The net premium received on closing the call spread is $ 10
From the above scenario, if the underlying price increases from $90 to $110 then the value of call spread does increase from $1 to $5. It might be prudent to book the profit here but this is not the maximum profit you can make from this strategy.
If the underlying price continues to stay greater than or equal the 110 (strike price of the option sold) at expiry then the value of call spread increases to $10 as seen in scenario 3.
The change in option price from scenario 2 to scenario 3 happens because the options price has a component of theta (time value of the option). You can read more about Theta here.
I hope this answers your query.
Note: The premiums values used are only for illustration purpose. The exact premium value is dependent upon the implied volatility of the options.
Thanks,
Team Quantra