Hey Folks,
I have a Credit Put Spread on BAYN with 5 contracts of 64/62 Put Credit Spread expiring 17th May @ 0.7 euro credit (i.e max loss 650 euro).
Stock went down then started moving up a bit hence did not adjust but now increasingly looking to tank further. Currently trading around 60 euro (i.e both short and long are breached).
Sounds like I have a "Do Nothing" (and suffer) situation
Any other views please?
Any further complication if assigned esp between the Put strike prices?
Thx
Dave
The answer is to close the trade. Exit.
This should be a simple trade but I've struggled to work out what's going on from your info. Is the "60 Euro" a typo? If it was 600 it would make more sense.
I was testing these Bull Put as well as Bear Call credit spreads a little while back and found them really forgiving. The max loss doesn't occur mostly until late in the trade towards expiry (unless SP has gone a long way against you) and so with 5wks to go you can get out of this trade fairly cheaply. These spreads if put on 5-8wks out seem to give you a week or two to have a look at direction with a low cost to exit, as long as you take it off when wrong.
I look at these as a portfolio or series of trades rather than in isolation:
So capital at risk is max loss of Euro650
Credit of Euro350 gives a 54% return on capital if correct.
Currently your loss (if price is Euro600 less 350Credit) of net Euro250 is 38% of capital as you're wrong. Great.
Over a series of these trades if you win more times than you lose guessing direction, you have some technical edge. If you can then get a higher return on capital for a win than the average capital lost on your losing trades, you'll have a very profitable system.
Summary, you appear wrong on direction and your loss on capital % is still less your profit potential % on the trade, so you close it. Then put the next trade on. Then the next one. Then the next one. Etc. Then if you have a genuine edge in selecting these types of trades you retire a millionaire.
