Credit Spread Mgmt. example

S

Soon2Bgreat

On 11/24/08 i sold a 96/100 spread on SPY at about .40 and SPY was trading ~85.

Fast forward to Wed. night close and SPY is at 88.9 and my unrealized is -.50 so i'd have to buy back for ~.90. I wanted to do it as the trade went further against me than anticipated but then i figured I'd wait until friday morning to check out the premarket futures and let some time pass.

This morning i considered buying a 90/91 debit spread for ~.50 on the open as a slight hedge to my credit spread.

The market has thus far traded down and if i can hold off closing my credit spread through the weekend that would help my position a good amount.

I'm debating between simply closing the spread or buying a debit spread for ~.50 either today or monday. I'm leaning towards trying to hold off until monday for buying the debit spread unless SPY approaches 90 in today's trading.

Any opinions?
 
Quote from Soon2Bgreat:

On 11/24/08 i sold a 96/100 spread on SPY at about .40 and SPY was trading ~85.

Fast forward to Wed. night close and SPY is at 88.9 and my unrealized is -.50 so i'd have to buy back for ~.90. I wanted to do it as the trade went further against me than anticipated but then i figured I'd wait until friday morning to check out the premarket futures and let some time pass.

This morning i considered buying a 90/91 debit spread for ~.50 on the open as a slight hedge to my credit spread.

The market has thus far traded down and if i can hold off closing my credit spread through the weekend that would help my position a good amount.

I'm debating between simply closing the spread or buying a debit spread for ~.50 either today or monday. I'm leaning towards trying to hold off until monday for buying the debit spread unless SPY approaches 90 in today's trading.

Any opinions?
More...

1) It's <i>always</i> tempting to hold longer.

2) The real question is: How uncomfortable/afraid are you? If you are really unhappy with this position, it's not right to hold. If you are merely 'concerned,' then it's a tougher call.

3) Buying the 90/91 point spread offers, as you say, partial protection. It even provides a zone of pure profit, but how much will it reduce your anxiety? That's another difficult question.

4) You don't have to go 'all or none.' You can buy in 10%, 20% etc of your short spread.


The problem with your seeking opinions is that no one knows where the market is headed and we all hate to buy in a spread, only to see the market reverse. But managing risk is an essential skill. And every trader has his own rules.

I suggest you not allow this position to keep you awake at night. that's the point beyond which you cannot afford to hold. If it's nowhere near that bad, then your delay tactics may help.

I also find myself a bit short here and would prefer to do nothing. But, risk management comes before my preferences and sometimes it's just prudent to a take a loss and move on. I'm sorry, but I cannot offer better advice and I hope you find a way to stay within your comfort zone.

Mark
http://blog.mdwoptions.com/options_for_rookies
 
First thing to note, weekend decay usually comes out of the options before the weekend. This week the market makers have probably adjusted their models even before yesterday to account for all 4 days (Thu-Sun). So my guess would be that holding thru the weekend ain't gonna do your position much good.

And secondly, you mentioned that the position has already gone against you by more than you anticipated so, presumably, that means that it has gone thru your stop, in which case you should respect your stop and get out. Don't second-guess your initial plan, if you had it.
 
MTE - I agree, my stop was hit, so i need to do something, my debate was between closing or adjusting. My thinking is that i should've adjusted as that is a big benefit to options.

Dag - You raise some good points. As well SPY didn't quite make the downward move as of yet i would've liked. (trade 89 as i post)

All said and done it's clear the right thing to do since the beginning was to close the position as my stop was violated (and i miscalculated my p/l scenario beforehand).

As Dag mentioned my anxiety was high enough to post about it on a message board....so i just closed the position. (bought it back at .88)

I feel good about it and can now move on to the next trade. Live to die another day.

Thanks.
 
You must log in or register to reply here.
Back
Top