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Creative ways to salvage a vertical spread.
- Thread starter MathAndLogic
- Start date
Ammo,I am familiar with boxes,but you are confusing me with "diagnol".How do we go from being wrong on a vertical,to rollng into a box and introducing a diagnol??
Once you are wrong on direction,you have an unrealised loss.Any positions added are simply a new bet.Either they stand on their own or they shouldn't be put on..
Salvaging is shuffling the deck chairs on the Titanic
Once you are wrong on direction,you have an unrealised loss.Any positions added are simply a new bet.Either they stand on their own or they shouldn't be put on..
Salvaging is shuffling the deck chairs on the Titanic
Quote from ammo:
100% serious, you sell the bigger diagonal, you let the premium come in, you buy the smaller diagonal near the close,that box be it a 3 ,5 or 20 dollar box will always be worth only that,its a 4 legged neutral position that you either scalp ,adjust on mornings for premium erosion(lift the long diagonal), adjust for volatility expansion(lift the short diagonal),trenddays(lift the losing leg of the put or call sprd),a lot of possibilities,and u can easily get neutral at any time,its just that on the floor the cost of getting in and out is minimal, out here its at least twice the price with commissions
Quote from taowave:
Ammo,I am familiar with boxes,but you are confusing me with "diagnol".How do we go from being wrong on a vertical,to rollng into a box and introducing a diagnol??
Once you are wrong on direction,you have an unrealised loss.Any positions added are simply a new bet.Either they stand on their own or they shouldn't be put on..
Salvaging is shuffling the deck chairs on the Titanic
Hindsight is 20/20. My original analysis showed good chance that SPY wouldn't close above 116, and my second analysis show excellent chance it would close above 118. Should have just gone to sleep this month. SPY close at 115.97 today. Damn !
IF I read all of this right, this only works if all of them are in the money - right? IOW, unless it's over $119 you're SOL, right?Quote from ammo:
your short the 116 call and long the 119 call, you short the 119 put and buy the 116 put, now u have a box ,( short 1 diagonal,long another).that willl always be worth 3...
Quote from MathAndLogic:
Hindsight is 20/20. My original analysis showed good chance that SPY wouldn't close above 116, and my second analysis show excellent chance it would close above 118. Should have just gone to sleep this month. SPY close at 115.97 today. Damn !
m&l,
...""my second analysis show excellent chance it would close above 118. ""...is this right?
I sell credit spreads as well, and let me tell you. NOBODY made money. Everybody lost money. Thus to say you could have saved this one is impossible.
The only way to have saved this one is to have enough margin to ensure that you can stay out of the markets way long enough. Oddly enough this cycle I kept lots of margin available. I had this dark feeling that something should go wrong.
AND it did...
The real loss on this trade would be around 10% to 20% of your capital if you are a full credit trader. I kept my losses to 3.5%, because I had the margin to keep ahead of the market. So why did I say original 10 to 20? Because most people don't keep enough margin...
This month just sucked and there was no winning this cycle, unless you just did not play. And fulltime traders would have played...
Christian
The only way to have saved this one is to have enough margin to ensure that you can stay out of the markets way long enough. Oddly enough this cycle I kept lots of margin available. I had this dark feeling that something should go wrong.
AND it did...
The real loss on this trade would be around 10% to 20% of your capital if you are a full credit trader. I kept my losses to 3.5%, because I had the margin to keep ahead of the market. So why did I say original 10 to 20? Because most people don't keep enough margin...
This month just sucked and there was no winning this cycle, unless you just did not play. And fulltime traders would have played...
Christian
Quote from MathAndLogic:
Hello:
I am trying to get some suggestions to salvage a vertical spread. I initially had 116/119 bear call spread on SPY. I rolled to 118/121 when SPY rose past 114 on the employment report. There was a loss on this rolling.
Yesterday when SPY rose past 117, I closed out the spread with more loss, even though my calculation showed a very low probability that SPY would reach 118 by Friday. With SPY slightly down today, I am thinking maybe I shouldn't have close the spread.
Optioncoach has a vertical spread thread. His ways to salvage a vertical spread include rolling up or down, buying calls/puts. Some people convert the spread to a butterfly.
Anyone care to discuss the pros/cons of various creative damage control?
Thanks.
Interesting discussion. Please read my comments very carefully before you respond!
Credit spread trading is a very interesting game. Frankly, adjustments are a huge part of how I play (and succeed) . To me, an adjustment is an admission that you have been wrong and need to get out of the way. I do this in part or in whole much before the problem becomes a nightmare. Exiting some of the position is one of my methods of adjustment.
The scary thing to me is that many people write credit spreads a long way out of the money, and then wait until they are in the money to adjust, hoping all the time that things will work out, which is a big mistake. Of course, at that point, they will be sitting on a paper loss that will chew up much of their margin. Now they have a difficult decision to make. Closing the position will result in a significant reduction in capital. If the person has most of their margin tied up in the single position (which is another major mistake, of course), they will experience a major depletion in operating capital. Should they simply exit?
My position here is probably radical. If you have made the huge mistakes outlined above, then selling will crystallize the loss. This is a certainty. In that horrible situation, I'd recommend rolling out to the next month which gives an opportunity for recovery in the next month. It may be that this rolling has to happen several times, but if the capital loss is going to be more than 50% of the portfolio, it might be the best way. Of course, this is no guarantee of escape and recovery, and at some point (say a few months later) admitting defeat may be inevitable, but exiting guarantees failure. (With American style options, you may also have no choice in the matter.)
Rolling also gives the opportunity to use credit spreads on the other side to regain capital.
Personally, I play using iron condors and broken wing butterflies because they have both a winning side and a losing side. I also typically hold some "insurance spreads" that gain in value as the market heads toward my credit spreads. The net effect is that you can't lose on both sides. Then you can adjust your position to make it more delta neutral, without chasing the market nearly so much. That's when adjustments make a lot of sense.
Keeping margin available is also critical to this process. It is essential to be able to maneuver, and avoid catastrophic failure.
Credit spread trading is a very interesting game. Frankly, adjustments are a huge part of how I play (and succeed) . To me, an adjustment is an admission that you have been wrong and need to get out of the way. I do this in part or in whole much before the problem becomes a nightmare. Exiting some of the position is one of my methods of adjustment.
The scary thing to me is that many people write credit spreads a long way out of the money, and then wait until they are in the money to adjust, hoping all the time that things will work out, which is a big mistake. Of course, at that point, they will be sitting on a paper loss that will chew up much of their margin. Now they have a difficult decision to make. Closing the position will result in a significant reduction in capital. If the person has most of their margin tied up in the single position (which is another major mistake, of course), they will experience a major depletion in operating capital. Should they simply exit?
My position here is probably radical. If you have made the huge mistakes outlined above, then selling will crystallize the loss. This is a certainty. In that horrible situation, I'd recommend rolling out to the next month which gives an opportunity for recovery in the next month. It may be that this rolling has to happen several times, but if the capital loss is going to be more than 50% of the portfolio, it might be the best way. Of course, this is no guarantee of escape and recovery, and at some point (say a few months later) admitting defeat may be inevitable, but exiting guarantees failure. (With American style options, you may also have no choice in the matter.)
Rolling also gives the opportunity to use credit spreads on the other side to regain capital.
Personally, I play using iron condors and broken wing butterflies because they have both a winning side and a losing side. I also typically hold some "insurance spreads" that gain in value as the market heads toward my credit spreads. The net effect is that you can't lose on both sides. Then you can adjust your position to make it more delta neutral, without chasing the market nearly so much. That's when adjustments make a lot of sense.
Keeping margin available is also critical to this process. It is essential to be able to maneuver, and avoid catastrophic failure.