Attached are two charts with calculated credit spread values for an 1140/1150 SPX bull put and an 1130/1140 bull put. Both charts assume 10 days to expiration. One chart is for a 15% volatility and the other is for a 20% volatility.
The B-S pricer was used to calculate individual option prices assuming an interest rate of 0% and a dividend yield of 0%.
It's interesting that the curves have a region that is essentially linear. With a 10 to 15 point distance between SPX price and short strike as a trigger, the credit spread value would be in this linear range.
The vertical distance between the two curves at a given SPX price is the amount that would be lost by rolling the 1140/1150 spread down to an 1130/1140 spread. In the linear range, the loss doesn't vary as much as I would have thought. At a 15% volatility the loss is $0.83 at SPX = 1170, peaking at $1.39 at SPX = 1140, and then back to $0.78 at SPX = 1110. Nothing is included here on rolling any bear calls down or how much was initially brought in as credit.
Interestingly, at a higher volatility, the loss from adjusting is theoretically less. Also, it's interesting (at least to me) that the loss from adjusting is not nearly as great as I would have expected once the short strike of the original position is ATM or even ITM.
I think these curves support the idea that if one really feels that there is strong support at a level, then one can hold on longer before adjusting (i.e. maybe wait until 5 points or even ATM to adjust). It appears that you won't lose much more from the adjustment by holding on. HOWEVER, with an adjustment, the idea is that the adjusted position will expire OTM. If it doesn't, then that's a substantial loss on top of the adjustment loss. But it's late and I'm a little muddled in my analysis here, because the SPX will do whatever it wants to regardless of when one adjusts. So, for example, if strong support were at 1150 and the original position were 1140/1150 bull put, then whether one adjusts at 1160 or 1150, the loss from the adjustment is not all that different (let's ignore the accompanying bear call roll down for now). The SPX might still break this strong support and go down to 1140 regardless of whether I adjusted at 1160 or 1150. If I adjust at 1160, I guess I could adjust again at 1150, whereas if I wait until 1150, it's much more difficult. But in the end does one come out ahead if the SPX goes down to 1140? Since this example uses a strategy that assumes that 1150 is strong support, once that support is broken then maybe the only smart thing to do is bail out of the position.
This is all theoretical of course and one has to consider b/a and so on. But if the position can be adjusted using a butterfly, then one should be able to remove the risk associated with sequential rolling of the spread.
Also, I personally don't yet have a good feel for how days to expiration affects all of this.
I thought I would just get the ball rolling and welcome comments and analysis.
The B-S pricer was used to calculate individual option prices assuming an interest rate of 0% and a dividend yield of 0%.
It's interesting that the curves have a region that is essentially linear. With a 10 to 15 point distance between SPX price and short strike as a trigger, the credit spread value would be in this linear range.
The vertical distance between the two curves at a given SPX price is the amount that would be lost by rolling the 1140/1150 spread down to an 1130/1140 spread. In the linear range, the loss doesn't vary as much as I would have thought. At a 15% volatility the loss is $0.83 at SPX = 1170, peaking at $1.39 at SPX = 1140, and then back to $0.78 at SPX = 1110. Nothing is included here on rolling any bear calls down or how much was initially brought in as credit.
Interestingly, at a higher volatility, the loss from adjusting is theoretically less. Also, it's interesting (at least to me) that the loss from adjusting is not nearly as great as I would have expected once the short strike of the original position is ATM or even ITM.
I think these curves support the idea that if one really feels that there is strong support at a level, then one can hold on longer before adjusting (i.e. maybe wait until 5 points or even ATM to adjust). It appears that you won't lose much more from the adjustment by holding on. HOWEVER, with an adjustment, the idea is that the adjusted position will expire OTM. If it doesn't, then that's a substantial loss on top of the adjustment loss. But it's late and I'm a little muddled in my analysis here, because the SPX will do whatever it wants to regardless of when one adjusts. So, for example, if strong support were at 1150 and the original position were 1140/1150 bull put, then whether one adjusts at 1160 or 1150, the loss from the adjustment is not all that different (let's ignore the accompanying bear call roll down for now). The SPX might still break this strong support and go down to 1140 regardless of whether I adjusted at 1160 or 1150. If I adjust at 1160, I guess I could adjust again at 1150, whereas if I wait until 1150, it's much more difficult. But in the end does one come out ahead if the SPX goes down to 1140? Since this example uses a strategy that assumes that 1150 is strong support, once that support is broken then maybe the only smart thing to do is bail out of the position.
This is all theoretical of course and one has to consider b/a and so on. But if the position can be adjusted using a butterfly, then one should be able to remove the risk associated with sequential rolling of the spread.
Also, I personally don't yet have a good feel for how days to expiration affects all of this.
I thought I would just get the ball rolling and welcome comments and analysis.
