Bear call spread needs repair

B

bc1

Hi all, I'm a new trader, went to a couple seminars, been paper trading a couple months, and reading everything I can including here on the web and ran across this site tonight.

Anyway I started doing cash trading last week on a small account doing three trades so far. One I did on Tuesday night was completed on market open on Wed for Netflix when the price was 107.25. Now the price has gone through the roof. They expire tomorrow.

2 contracts-NFLX sold the OctWeek2 110 bear call to open and bought the OctWeek2 115 bear call to open. Received a net credit around $330.

The price went up to 115 about a half hour after it opened on Wed and now is up to around 118.

I'm just looking for ideas on repair.

1. I may watch it until noon to see if the price comes down and just close both legs for a loss. Max loss would be $1000.

2. I guess I could buy the 110 call back, take that loss on the 110, and keep the 115 open as the price seems to be rising but I'm not sure of the ramnifications of that.

3. I could try to roll it into Nov11 bear call but I'm not sure where that stock would be in November so that may not work.

Thanks for any help and I won't get into anymore last week trades again. We now seem to be in some kind of bear/bull call rally and the best that can happen is that it ends tonight. I'm not afraid to take a loss but hope to learn from it.

bc1
 
Thanks anyway guys. I guess as a newbie on the board, my thread sat in suspension until it was past ripe and too late to answer. Anyway, I worked through all the repair strategies, crunched numbers, checked the charts, and then correlated everything with my trading strategy and expectancy. I traded the appropriate strategy today and everything is hunky dory. :) I've been going back through old threads to see if there is anything interesting in them. Since I'm more of a newbie than an elite trader, I probably won't be doing anything around here except hanging out. Thanks again.
 
if you are a new trader, your best route initially is to trade these spreads on stocks that are not a volatile as nflx. This way u can observe how the spread unfolds as time/vol,stock changes. Doing it on a volatile stock means observation takes a back seat to capital preservation as the stock whips violently up and down and your pnl goes from +200 to -$200 daily.

You might get entertained and make a couple of $ in the process but in the end you still would not have learned the reason underlying that good trade or losing trade.
 
Small detail but the max loss would have been $670 at exp, less now (difference in strikes less premium received).

Sorrry you didn't get an answer in a timely fashion but I don't think that it would have made a difference. With any adjustment that you make, the underlying has to cooperate subsequently and no one could know what that direction would be, You actually addressed this yourself: "... but I'm not sure where that stock would be in November so that may not work."
 
Quote from bc1:

Hi all, I'm a new trader, went to a couple seminars, been paper trading a couple months, and reading everything I can including here on the web and ran across this site tonight.

Anyway I started doing cash trading last week on a small account doing three trades so far. One I did on Tuesday night was completed on market open on Wed for Netflix when the price was 107.25. Now the price has gone through the roof. They expire tomorrow.

2 contracts-NFLX sold the OctWeek2 110 bear call to open and bought the OctWeek2 115 bear call to open. Received a net credit around $330.

The price went up to 115 about a half hour after it opened on Wed and now is up to around 118.

I'm just looking for ideas on repair.

1. I may watch it until noon to see if the price comes down and just close both legs for a loss. Max loss would be $1000.

2. I guess I could buy the 110 call back, take that loss on the 110, and keep the 115 open as the price seems to be rising but I'm not sure of the ramnifications of that.

3. I could try to roll it into Nov11 bear call but I'm not sure where that stock would be in November so that may not work.

Thanks for any help and I won't get into anymore last week trades again. We now seem to be in some kind of bear/bull call rally and the best that can happen is that it ends tonight. I'm not afraid to take a loss but hope to learn from it.

bc1
More...

selling an at the money call with one day out is a "pot shot" at NFLX expiring at 110 or below. you bought the 115 call to protect yourself in case it blew up to the upside.


(1) if NFLX came off later in the day, why would you buy both legs in? the 115 call would have essentially been worthless, and the 110 call worth (NFLX price - 110). if anything, you could have bought in the 110 call and hope/pray that NFLX solves cold fusion.

also, you sold the call spread for 3.30. the max loss would have been

-5.00 (difference between strikes)
+3.30 (credit)

-1.7 * 100 = -$170 for each call spread before commissions.

(2) the ramifications are, if you buy in the 110 call, and immediately afterward NFLX trades 180, the 115 call would be worth 65 ($6,500 per call).

(3) you have to have reasons for your trade. selling an atm call spread 1 day out is saying, "NFLX won't expire hire than somewhere between my short and long call." rolling it to Nov only makes sense if you think NFLX will do something by that time.


here's the question you should be asking yourself: why didn't you pay $170 for the 110-115 put spread?
 
I am curious what the reason was to do this trade and why on NFLX? Is this one you are very familar with? Or was it just like walking up to a slot machine and finding the one with the nicest colors, sounds and potential jackpots?

It would be helpful if you can articulate the reason for this trade.
 
the 110-15 put spread is the same thing as the 110-15 call spread. so there really is no advantage to doing either or. but depending on if you wanted to get out of the trade, you could have either bid for the call spread, or offered the put spread to "box" off the trade.

i think when you structure these trades, sure, you can make bets on expiry of the underlying only. but try to incorporate volatility as well (granted, you had a day till expiration, so the following doesn't apply to the reasoning for your trade):

1 month to expiration.
NFLX trading $120
NFLX historical vol 20%.

Now, suppose you think (1) NFLX is headed lower and (2) implied vol is cheap:

if you think vol is cheap, you want to be long options. the options with the highest vega (change in option price with change in vol) are at the money options.

if you think NFLX is headed lower, and you need to be long options, you need to buy at the money puts.

to finance this trade, you can sell out of the money puts in a 1:1 ratio with your at the money.
 
Don't repair, take your loss before the damage becomes unsustainable and you end up covering at the worst moment.
Stop playing volatile stocks with credit spreads.
Use credit spreads on NDX or RUT or other European Style options, far OTM and 2 month expiry date.
 
You must log in or register to reply here.
Back
Top