Question about adjusting basic spreads

R

RGLD

Hello ET,

I did an experiment on a trade AXP today. I had a 102/99 put spread on at the beginning of the week, I was up around $40, the stock was at 102.80 20 minutes before close and AXP's earnings are coming out today. Being the "pro" I am, I decided to buy back the 102 put and sell a 103. Now my spread is 103/99. If you look at AXP in the aftermarket.. OMG... The 103 put was worth $2, so my break even without my initial profit is 101. My 102 put was sold for 2.30 initally, and was bought back for 1.48. The 99 was worth .97. I'd imagine it'd expire worthless this Friday.

My question is not about this trade in particular but is this a "good idea". On paper it sounds like a very clever move, but what is your experience? Is this little operation worth it when a spread moves in your favor? You are adding extra risk for exta reward, I feel it is justified. My AXP decision was NOT however, as I feel the 102 still had plenty of premium left.

Sold 102 put @ 2.3
Bought 99 put @ .97
Sold 103 put @ 2
Bought to Cover 102 put @ 1.48 (0.82 profit)


Old spread Max profit: $133
Old Spread Max Loss: -$167

New Spread Max Profit: $185
New Spread Max Loss: -$215

Yea... I messed up...
 
Last edited:
RGLD said:
Hello ET,

I did an experiment on a trade AXP today. I had a 102/99 put spread on at the beginning of the week, I was up around $40, the stock was at 102.80 20 minutes before close and AXP's earnings are coming out today. Being the "pro" I am, I decided to buy back the 102 put and sell a 103. Now my spread is 103/99. If you look at AXP in the aftermarket.. OMG... The 103 put was worth $2, so my break even without my initial profit is 101. My 102 put was sold for 2.30 initally, and was bought back for 1.48. The 99 was worth .97. I'd imagine it'd expire worthless this Friday.

My question is not about this trade in particular but is this a "good idea". On paper it sounds like a very clever move, but what is your experience? Is this little operation worth it when a spread moves in your favor? You are adding extra risk for exta reward, I feel it is justified. My AXP decision was NOT however, as I feel the 102 still had plenty of premium left.

Sold 102 put @ 2.3
Bought 99 put @ .97
Sold 103 put @ 2
Bought to Cover 102 put @ 1.48 (0.82 profit)


Old spread Max profit: $133
Old Spread Max Loss: -$167

New Spread Max Profit: $185
New Spread Max Loss: -$215

Yea... I messed up...
More...


Just my 2 cents. I tried options spreads and ended up losing thousands of dollars on it. You collect maybe, a paltry $200-$300 tops for the spread but, it goes against you, you will lose in the thousands. As far as the risk/reward ratio is, the risk is far larger than the paltry reward to make it worthwhile. I now, just trade directionally, call or put options where the reward is unlimited to the upside for call options and limited to the downside up to zero if I had put options. My risk on a worst case scenario is the cost of the premium of the call or put option.
And one leg of your spread is a guaranteed loser most times and used to hedge against losses when it turns against you! You are throwing money down the drain if you think about it.
 
smallfil said:
Just my 2 cents. I tried options spreads and ended up losing thousands of dollars on it. You collect maybe, a paltry $200-$300 tops for the spread but, it goes against you, you will lose in the thousands. it.
More...

I guess based on this answer, you didn't even read what I wrote?

Old spread Max profit: $133
Old Spread Max Loss: -$167

My reward/risk is ~ 40/60. If you're wondering how that's possible, maybe you should learn more about options.

Also 80% of options spreads are directional.
 
Last edited:
RGLD said:
I guess based on this answer, you didn't even read what I wrote?

Old spread Max profit: $133
Old Spread Max Loss: -$167

My reward/risk is ~ 40/60. If you're wondering how that's possible, maybe you should learn more about options.
More...

Oh, I understand options. I was responding in general terms as to why I believe options spreads are not a good deal. Normally, you just close the options when you have profits and do not add additional legs to it. Profits in options trades could be fleeting and be gone in a short period of time so, why muck around with it? Close your position and move to the next trade. Adjustments to options spreads are usually done to mitigate losses if it can be done. If you have profits, you take your profits and close it out!
 
RGLD said:
My question is not about this trade in particular but is this a "good idea". On paper it sounds like a very clever move, but what is your experience? Is this little operation worth it when a spread moves in your favor? You are adding extra risk for exta reward, I feel it is justified.
More...

If you can run a reward-to-risk ratio, you can compute your answer.
Sometimes we get lazy and think "Close enough!"
But the answer you seek is right there in your numbers.
Especially, in the position and portfolio greeks.

FWIW, I have my own bit of laziness --
I have begun selling spreads with greater legs than I am used to.
("Than I might *prefer*?!?! This is the repeating decline in volatility scaring the feces out of me....)
Instead of maybe multiples of 2-strike-wide spreads, I'll sell a single 3-strike or 4-strike further out, and whittle it down as the market pressures the other direction, by buying-in the further insurance strike. "Trimming the ends."

For example, I sold a Jul27 2850/2870 earlier this week (late last week?), and I'm now buying in the legs for 10¢-25¢. (A 1/4 of their prior value.) As the market comes back north, I'll do the same on the put side. (I did that yesterday, in fact.)

I haven't worked out the exact mechanics of this yet. ("LAZY!") But I'm nibbling off the ends, as the market works the other side. This means I'm trading the least-market-interest strikes, rather than stressing about the most-market-interest strikes. (And, in point-of-fact, as the market approaches those to the point of soreness, I buy'em/away, one strike at a time.)

But I'm cutting my trading costs in half, too, by not working *spreads*, but only *sold* positions as the market moves close, and *owned* positions as the market moves away.

If I can sell a $20 Jul31 position for $1.50-$2.00, and work it down to a $10 position worth $1.00, in delta- and vega- risk-reducing trades? Trades that cost half as much as moving the entire spread? That seems a good thing, to me.

I just gotta document it better. "Prepare it for coding." and all that. :wtf:

:D
 
Last edited:
You must log in or register to reply here.
Back
Top