How do you adjust these types of credit spread 'issues'?

G

gangof4

When you enter an OTM credit spread and it then moves ITM against you, say 2 weeks from expiration, how do you adjust the position? 2 examples:

short July 27.50 put currently @ 1.70
long July 25 put @ .50
stock @ 26.50, IV around 58 on both

short 90 calls currently @ 5.30
long 95 calls currently @ 2.60
stock @ 93, IV around 48 on both

I expect both examples to move back to the short strike, or even back OTM. The long positions in both will get crushed on such a move given 10 days to expiration- so a move to around the short strikes won't help me all that much. Because i expect a move in my favour next week, I don't want to close now. I won't sell the long strikes and go naked (not THAT stupid), and I prefer not to hold until expiration.

So... confronted with this reality, what do you do to adjust the position?

Disclaimer: After a string of many boring (read: not stupid) well OTM credit spreads and condors, I got dumb greedy and decided to try putting on a couple of them closer to the underlying to collect more premium (read: i decided to lose money!). So, yeah, this was stupid, and I know it. The greedy choice of strikes was my biggest mistake. If I'd have stuck with my original 'boring' choice of strikes, i'd be up in the positions, despite the fact that i entered poorly- right after the IV got dumped out.

thanks.
 
Quote from gangof4:



I expect both examples to move back to the short strike, or even back OTM.
More...

if you expect this then don't do anything. there's nothing wrong with selling spreads. just most people sell a put spreads on rallys and call spreads on declines when they should do the opposite.
 
Taking them separately. With the first the spread is 2.5 and I'm assuming you got at least $1 therefore your max loss is $1.5. With an IV of 58 you don't have a clue where it will end and those types of stocks and swing like crazy so I would at this point sit tight and be prepared to take the loss. no big deal

the other is a 5 pt spread...more troublesom. Adjustments are usually made before they go ITM. Again it is a CS so defined risk. If you feel strongly things WILL go your way (TA or fundy) eventually one option is to do a vertical roll assuming it doesn't hit your long strike by expiration day. If you chose this option you essentially are taking a loss this month with a chance of profit next. It is also important to wring all theta out of it by taking it all the way to expiration. If it hasn't gone thru both strikes you can usually roll for a small credit. This of course adds more risk. I did that last month with my spx trade and have been trading like crazy this month to work thru it...so far so good but not having much fun:(

I'd at least give the market a chance to make you right over the next few trading days as we seem by many measures to be in overbought territory. However if it does help you out TAKE IT and run (ie. close) because if you then hang on it can (and will)come right back up!!
 
Quote from rosy:

if you expect this then don't do anything. there's nothing wrong with selling spreads. just most people sell a put spreads on rallys and call spreads on declines when they should do the opposite.
More...

the problem with doing nothing is that, although i see a move back towards (or even through) both short strikes next week, my degree of confidence that they will end up there is not high. given the charts, the position where i'm short the 90's could very well end up @ 95 (resistance level) on expiration, after pulling back to 88 next week. further illustrating my folly in going with a 90/95 spread vs 95/100.

so, trying to figure the best/cheapest way to play a pull back without going naked.
 
Quote from Aardvark:

Taking them separately. With the first the spread is 2.5 and I'm assuming you got at least $1 therefore your max loss is $1.5. With an IV of 58 you don't have a clue where it will end and those types of stocks and swing like crazy so I would at this point sit tight and be prepared to take the loss. no big deal

the other is a 5 pt spread...more troublesom. Adjustments are usually made before they go ITM. Again it is a CS so defined risk. If you feel strongly things WILL go your way (TA or fundy) eventually one option is to do a vertical roll assuming it doesn't hit your long strike by expiration day. If you chose this option you essentially are taking a loss this month with a chance of profit next. It is also important to wring all theta out of it by taking it all the way to expiration. If it hasn't gone thru both strikes you can usually roll for a small credit. This of course adds more risk. I did that last month with my spx trade and have been trading like crazy this month to work thru it...so far so good but not having much fun:(

I'd at least give the market a chance to make you right over the next few trading days as we seem by many measures to be in overbought territory. However if it does help you out TAKE IT and run (ie. close) because if you then hang on it can (and will)come right back up!!
More...

my entry on the 25/27 1/2 was just stupid by many measures- no, cdt of only .60- yes, i'm dumb. actually, just toococky after many winning cdt spreads that were entered correctly- i guess i though picking the wrong strike and not being compensated would still work out! dumb.

the answer on the 90/95's is probably jsut to take what i can get on a pull back (you're right, or it will come right back up against me!). of course, riskarb or coach probably has a more sophisticated way to adjust it. maybe they''ll lean towards a roll too.

thanks.
 
I won't speak for coach or Risk but my guess is they would tell you to close them.
There really aren't any sophisticated ways of adjusting losing trades. Generally most adjustments are done on winning trades to generate more $$. The vertical roll may help but its very risky as well...you may just be postponing a bigger loss than what you have now, so you do need to take that under consideration.
ps your not dumb...only the trade was ill advised:p
 
Disclaimer: After a string of many boring (read: not stupid) well OTM credit spreads and condors, I got dumb greedy and decided to try putting on a couple of them closer to the underlying to collect more premium (read: i decided to lose money!). So, yeah, this was stupid, and I know it. The greedy choice of strikes was my biggest mistake. If I'd have stuck with my original 'boring' choice of strikes, i'd be up in the positions, despite the fact that i entered poorly- right after the IV got dumped out.
More...

Hey, don't knock going closer to the underlying. This can be a good way to decrease certain types of risk. For example, selling premium closer to the ATM strikes allows you to take in more premium and therefore reduce risk by selling less contracts than you otherwise would further OTM.
 
Quote from gangof4:


I expect both examples to move back to the short strike, or even back OTM.
More...

If this is your directional forecast then why do you feel the need to do anything at this point? There is nothing you can do to protect your current loss in the positions w/o introducing further risk. Just wait it out as a probability bet, it seems to me thats why the trade was opened in the first place even though you didnt specify your original intention.

good luck.
 
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