Repair strategy for spreads

patefern · Jan 20, 2003

Vertical spreads are directional and if they go the wrong way are there any repair strategies that people would like to share.

An example would be XYZ trading at 35, put on a vertical bear call spread, selling the 35 and buying the 40 with 3 weeks to expiration. With 10 days to expiration XYZ is at 38. A trader could "hold and hope" or close out the position. A repair strategy may be better, any suggestions?

GATrader · Jan 20, 2003

I don't see much here. The 35 strike you sold w/ 10 days would prob not have much fat in them unless the skew is steep due to forseeeable news coming in 10 days (i.e. earnings jury awards,etc) Possible repair is to sell out the long strike 40, if there is still some fat AND if the smile intermonth is ok, keep the short 35 and buy the next month(s) out turning it into a calendar spread. Even then that could be just making your broker wealthy instead of you. My advise, move on to the next trade, jsut take your time in getting out of this one so you don't get whacked with the VIG.

metooxx · Jan 20, 2003

Get flat and move on ...

AAAintheBeltway · Jan 20, 2003

You put on a vertical because something made you think the underlying was going to move. So I think you have to look at that strategy to decide if the reason for the trade is still valid or if the adverse move has negated it. Basically, you need a kick out point, based either on the underlying or the spread. Taking max losses on spreads is something to be avoided at all costs in my experience. In your example, with three weeks to go, if I thought the underlying had negated the original signal, I might be tempted to cover the short leg of the trade and hang on to the long side, which probably didn't cost much anyway. Do any more than that and it seems to me you're really into a totally different trade that requires a new rationale.

AAAintheBeltway · Jan 20, 2003

oops, I misstated the original example, it was that the underlying went to 38 with 10 days to go, not three weeks. Probably you are only a dollar and change in the hole at that point. I'd be tempted just to hang on and do nothing at that point. the underlying would only have to go down a buck or so for you to be b/e.

metooxx · Jan 20, 2003

Quote from AAAintheBeltway:

oops, I misstated the original example, it was that the underlying went to 38 with 10 days to go, not three weeks. Probably you are only a dollar and change in the hole at that point. I'd be tempted just to hang on and do nothing at that point. the underlying would only have to go down a buck or so for you to be b/e.

Hope, fear and greed.

The stock is more than half way through the strikes; give it up ...

EliteThink · Jan 21, 2003

'Probably should listen to the consensus, if you didn't have a plan to deal with the trade if it went against you, you may want to just shut it down.

AAAintheBeltway · Jan 21, 2003

Quote from metooxx:

Hope, fear and greed.

The stock is more than half way through the strikes; give it up ...

Over a lot of trades you're probably correct. Would you have an exit point based solely on the value of the spread or how would you decide?

metooxx · Jan 21, 2003

Quote from AAAintheBeltway:

Over a lot of trades you're probably correct. Would you have an exit point based solely on the value of the spread or how would you decide?

We only deal over a lot of trades; one trade is random.

If you did it as an OTM and the stock moved against you halfway through the strikes, I would liquidate and move on to the next trade ...

patefern · Jan 23, 2003

Quote from EliteThink:

'Probably should listen to the consensus, if you didn't have a plan to deal with the trade if it went against you, you may want to just shut it down.

Yes, "a plan" is what I am trying to formulate. Preserving capital is vital and because of the versatility of options with different strikes, puts, calls, months, I want to make an effort to try to salvage a position with all the available options.(no pun intended)

A calendar spread might work if the volatility didn't collapse, and the XYZ example didn't include the greeks which might make the risk/reward favorable with 10 days to expiration. And just closing out the position which has no valor, does seem the wisest thing to do.

I had thought of going long stock and a 35 put, or adding a bull put spread, or adding a bull call spread, none of which were appetizing considering the added risk to save a position.

I remember Cottle writing about all the methods you could apply to a winning position to enhance it but I don't recall anything about trading to improve a losing position, so I'll keep looking and asking because it is worth the effort.