Can a losing credit spread turn profitable

[CXMelga]

 

I have a quick question please as I have not seen this it explained any where

If xyz is trading at $100 a and  so a 'credit spread'  e.g.

I sell a put at 95 and buy a put at 90

If xyz goes down to $80 (and I am not assigned at at $95, but instead assigned at $80),  I lose $5 per share on the spread but would I make $10 per share on the long put?

Or would I always be assigned at or very close to $95 ?
Or will there never be a situation where I could make a profit from the situation described above

Thanks very much

 

[vasis]

Hi @CXMelga,

Your credit spread has always limited profit (money which you take from selling spread) and loss ($5). If xyz goes to $80 your sold leg will be assigned to 95$. No chance to get profit from credit spread if the market goes against you. 

At the beginning of options market <when not everything was automated> it was a chance to get profit on expiration if option's buyer forgot to assign your sold leg - but it happened very rare  

[James M]

My first thought is never do a credit spread on a stock/etf that you do not want or can not afford to own.  The good standing (balance sheet/management) along with volitility are very important.  When a good stock drops one or two standard deviations due to outside market issues, it is an opportunity.  Outside of that,  there are many instances when you will not be able to react in time to get out without assignment.  If your broker cooperates, you may be able to sell your credit leg and the assigned stock quickly avoiding the long stock position.  You will still be out the difference on the credit spread, possible underlying price change and fees.  On the other hand, if you can own the stock based on the above, take it and sell a covered call that covers your loses and even some profit.  That is the  only way I know to rescue a credit spread gone bad, of course it is not a sure thing.  There may be others, I would not mind learning about them.