Repair strategy for spreads

EliteThink · Jan 23, 2003

If you are looking for repairs McMillan covers at least one for every strategy in his book.

The thing with options, as you probably know, there are statistical odds when going in which translates to risk reward which translates to position sizing. If the trader starts to adjust, there are slippage issues to deal with as well as changing risk dynamics and sometimes it simply isn't worth it.

IndexTrader · Jan 23, 2003

Quote from patefern:

... 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. [/B]

Sounds like you're in love with the position. Just let it go.
If the position likes you too, it will probably give you an opportunity later on for re-entry.

patefern · Jan 23, 2003

Quote from IndexTrader:

Sounds like you're in love with the position. Just let it go.
If the position likes you too, it will probably give you an opportunity later on for re-entry.

Not in love, have no position in any spread gone wrong at this time, XYZ just an example. Just like being prepared, knowing what to do if X happens. However, I do love making a strong effort.

IndexTrader · Jan 23, 2003

Quote from patefern:

Not in love, have no position in any spread gone wrong at this time, XYZ just an example. Just like being prepared, knowing what to do if X happens. However, I do love making a strong effort.

How about...if X happens and you try to hedge by being a buyer of options, you've just bought a rapidly depreciating asset. If you sell options, you just made your losing position bigger, more complicated and now have to "nurse" more sick patients.

A great many instruments out there are available because they're designed to take YOUR money. To convince you otherwise, the exchanges come up with fancy bullshit ideas hoping you fall for it and enrich the MM's, members of these exchanges.
It's marketing! Why play their game?

iceman1 · Jan 23, 2003

since none of us will be there advising you in person... what do YOU think is the solution to your hypothetical... ?

iceman1 · Jan 23, 2003

I will give you one so-called 'secret' that I use very profitably...check out the open interest on the 35 calls and 35 puts; same for 40s ... and... while you're at it might as well check the 30s or 32.50s if open.

patefern · Jan 23, 2003

Quote from IndexTrader:

How about...if X happens and you try to hedge by being a buyer of options, you've just bought a rapidly depreciating asset. If you sell options, you just made your losing position bigger, more complicated and now have to "nurse" more sick patients.

Are you saying that no matter what happens to a stock or option position that goes against you it is better to not buy/sell options as a hedge?

If you are long ABC stock at 30 and long a 30 put for 1 1/2 and the stock goes to 26, and the 30 put is now 5 1/4 and the 25 put is 1/2, what would you suggest doing?

patefern · Jan 23, 2003

Quote from iceman1:

since none of us will be there advising you in person... what do YOU think is the solution to your hypothetical... ?

Cover the short call. Can't think of anything else without adding more risk trying to salvage the position. I didn't have an answer to the repair strategy question I asked so I can't spring it on you.

AAAintheBeltway · Jan 23, 2003

I find the flip side of this question equally interesting. The credit spread immediately goes in your favor by a buck or so. You have three weeks to expiration. What do you do?

patefern · Jan 24, 2003

Quote from AAAintheBeltway:

I find the flip side of this question equally interesting. The credit spread immediately goes in your favor by a buck or so. You have three weeks to expiration. What do you do?

Probably nothing if up 1, want the theta to work on the short call. Using the XYZ example, if the spread was up 3, stock at 32. Depending on a number of factors,(delta, prices)I could buy back some short 35 calls, closing out some of the position, but I would rather buy the stock at 32 and buy the OTM 30 put. Having the position stay open and profiting in either direction, and in place for a large move.

Put on a bull put spread, sell the 35 put, buy the 30. If the stock goes up from 32 the put spread profits, down from 32 the bear spread profits. Both are credit spreads and time decay is working for you.