Delivery-based settlement changes some of the characteristics of spread strategies. This week, we discuss why you should be mindful of delivery risk in the case of bull call spread and how you can moderate the risk.
The trade-off
We define delivery risk as the risk that the lower strike call option of your bull call spread will become in-the-money (ITM) at expiry, requiring you to take delivery of the underlying shares. This is a risk because of two reasons. One, you require large capital to buy the shares. And two, the stock price may move adversely with reference to your buying price when you sell the shares in the spot market.
The delivery risk can be moderated in two ways. One, you set up the bull call spread the typical way and close the position just before expiry. That is, you identify an overhead resistance level for the underlying. You then buy a call option immediately above the current price (at-the-money strike) and short an out-of-the-money (OTM) call option one strike above the identified resistance level. You should close the spread position before expiry. But that would mean you will be unable to capture the maximum gains on the position. Note that the maximum gain on the spread is the difference between the strike and the net debit. This can be realised at expiry if the stock trades at or above the higher strike. Suppose you close the position at 3 pm on the expiry day. The time value of both the options will be low. So, you will be able to capture most of the gains from the position. The issue arises when the stock is trading at a price that is lower than the higher strike. Your gains will be lower if you close the position, and the stock goes up thereafter.
An alternative strategy allows you to keep your spread position till expiry. This involves buying the same lower strike call, but the higher strike call should be below the resistance level. The objective is to have both strikes expire ITM. Why? In a delivery-based settlement, you are required to take delivery (give delivery) of the shares if you are long (short) ITM calls at expiry. When both strikes expire ITM, your broker could net-off the delivery requirement. But your gains will be lower compared to a typical call spread. This is because the gains you give-up choosing a lower strike short leg will be more than the cost saved from a lower net debit.
The maximum gain on the spread is the difference between the strike and net debit
Optional reading
The simplest way to avoid delivery risk is to close your call spread before expiry. You should time the action (not later than 3 pm on the expiry day) such that the realised gains are very close to the maximum gains that can be generated on the position. Note that your broker is likely to levy delivery margins on both the legs, starting four days from the expiry date.
(The author offers training programmes for individuals to manage their personal investments)
Published on February 21, 2026
