Credit Spread Repair Strategy?

need a lot more details. Sometimes selling the other side creating an IC then rolling up works..the problem with adjustments is your trading one set of problems for a potential new set, often getting yourself deeper in the hole. If you sold because you were negative on the equity (assuming its a bear call spread) then you need to re-evaluate your assumption and decide if you were flat wrong then just close. If you still believe your assumption is valid then sometimes using a B-fly to roll up a strike for minimal cost saving the majority of the credit. However if you are wrong then the costs mount.

Stocks are pretty clear cut if the spread goes bad just close it, however on indicies sometimes you can fade the market and time your adjustment which can work out ok.
 
There are several ways how one can adjust a credit spread that has turned bad....buyback, converting into a fly, using a sligshot hedge, etc. It also depends on what price did you start, how much time is left, etc. You may wanna share more details about the trade so get some suggestions from this wonderful forum,

Profitable trading,
www.OptionPundit.net
 
Any adjustment to a losing trade will result in an even worse risk/reward ratio so just close it out and move on.

Model the adjusted position and then compare it to the market price of that position and you'll see that you'd never even consider such a trade in the first place so why should you treat an adjustment differently!?
 
Here are the details. BTW thanks in advance.

last week, NTRI gapped up on earnings & guidance big time. It closed up 13.5 % to 49.79. The next day, it fell a bit, so SOLD the March 45 put for .90 and BOUGHT the march 40 put for .3. The bid/ask spread for both of them were the tightest.

The stock kept on falling and falling. Yesterday, I saw the stock go down to 45.10. The put that I sold was trading at 1.85. and the call was at .4.

My original exit strategy was to short sale NTRI if it got to 44.40 to hedge any danger. But I became inconfident with this strategy.

Any comments?

Thanks,

Torontoman
 
Re-cap, you have a $45/$40 bull put spread for $0.60 with stock around $49.

Stock is around $45 or so and spread is now worth $1.45

1. First off, shorting is not a hedge you should consider. Anything that greatly increases your risk is not appropriate when you have a limited risk position. So I would take shorting off the table because if you short and stock jumps to $49 again, you have a nice loss pending.

2. Your risk is limited to $4.40. I doubt you want to take that full loss if you are wrong so you need an exit plan ahead of time.

My advice for some rules are:

a. Consider getting out if spread doubles against you or triples against you depending on your risk tolerance.

b. Use a stop based on the stock. For example, if $44.20 is a key support area, stay in the trade as long as the stock stays above that level. If it breaks it, you are out.

c. If you still expect the stock to rebound then do nothing and keep your fingers ready to pull the trigger if it keeps falling.

d. you could make a plan where you never allow the short strike to get ITM and close as soon as it does.

Butterfly adjustments work better when spread is still OTM a strike or two but with stock right at your short strike it might not be worthwhile right now.


Quote from torontoman:

Here are the details. BTW thanks in advance.

last week, NTRI gapped up on earnings & guidance big time. It closed up 13.5 % to 49.79. The next day, it fell a bit, so SOLD the March 45 put for .90 and BOUGHT the march 40 put for .3. The bid/ask spread for both of them were the tightest.

The stock kept on falling and falling. Yesterday, I saw the stock go down to 45.10. The put that I sold was trading at 1.85. and the call was at .4.

My original exit strategy was to short sale NTRI if it got to 44.40 to hedge any danger. But I became inconfident with this strategy.

Any comments?

Thanks,

Torontoman
More...
 
Quote from torontoman:

The put that I sold was trading at 1.85. and the call was at .4.
More...

I assume you mean that the long put was at .40

IMO, you have 4 options:

1) If you continue to feel bullish on NTRI, you can roll out to April at the same strikes.

2) Same as above but roll down as well to a 40/35 spread.

3) Follow your planned hedge.

4) Close out

As mentioned by MTE, the last would probably be the best and most pain free option. It sounds like you are bullish by not wanting to short the underlying. If so, you can opt to be assigned on the stock.

I'm a believer in keeping it simple. You can convert to several other exotic positions, but most may be more difficult to manage.
 
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