Piccon,
I'm not Coach obviously and I'm sure he'll answer this for you in due course. In the mean time, here is a second opinion worth about as much as the paper it's printed on:
Ask yourself this: if you didn't have the credit spread on, would still you go long the DEC 1640 straddle that you are proposing?
If the answer is yes, and you think the NDX is going to move up or down fast and you think volatility is likely to increase then go ahead and buy the straddle as a completely different strategy based on your market sentiment. Manage the credit spread separately i.e. take it off if it no longer fits your sentiment.
The credit spread wants the underlying to sit still (become less volatile) or move down. The straddle wants the underlying to move fast (become more volatile) in any direction. These are two different strategies. Which one do you want?
If the answer is no, then are you buying the straddle to somehow defend the credit spread or more specifically the credit $ received?
This is where it get's complicated. If you are buying the straddle to protect or defend the credit spread then why are you buying the put? The put is bearish and your credit spread is already bearish. That's a lot of -ve deltas. If you're really bearish then you've nothing to worry about, the spread will be safe and there's no need for the call.
Things are further complicated by the fact the straddle is in a different month to the spread. This could indicate that your sentiment is different in the medium term than it is in the short term but based on what you wrote, this is not the reason you want to buy the straddle in a different month.
I don't want to put words in the mouth of Coach but his adjustment approach seems to be based around the credit received from the spread i.e. being prepared to use some of the credit received from the spread to finance some insurance to further "hedge" the position (let's not forget the spread is already a hedged position) e.g. if you received $10K for the spread, you might be willing to spend $2K on a hedge which under the right circumstances would make enough money for you to help close the spread you had on or possibly roll it up. If the hedge is not needed then you've spent $2K on insurance for which a claim was not needed. Furthermore, Coach and co. seem to prefer to buy hedges on separate but related instruments - perhaps for price or clarity.
Reading the last paragraph is perhaps the reason I do not personally take the same approach. Indeed, if you ran simulations you might find that you come out just as well or better by not buying the hedge insurance and simply adjusting or closing without it - but that's another story!
Looking at the strategy from the point of view of P/L of the credit received is certainly a valid approach but you may want to take a different approach: one that is based on your market sentiment RIGHT NOW. Forget your credit. What position would you like to have RIGHT NOW? Do you have it? If not, how do you metamorphize (sp?) your current position into one you do want? How much does it cost? Would you pay that much for the new position if you didn't have any position to start with?
These are not new concepts and are certainly not original thought by me. More here: http://www.riskdoctor.com
What this means is in your context is that you may end up paying more for an adjusted position than the initial credit you received but you could also end up making much more than you would have. This might be a hard strategy for some people to adopt but why keep a position on that no longer fits your sentiment.
After all of that philosophizing, I'm not sure I've added any value to this thread or to your question.
The two approaches are not neccessarily mutually exclusive. As has been discussed many times on this thread, there are millions of ways of adjusting credit spreads and it really depends on what you think is going to happen.Consider this one for your current spread if you think the index is going to finish somewhere very near your short strike THIS MONTH (is that what you think?): rather than buying the DEC 1640, you could buy the NOV 1640 and bring the cost down by selling one of your long NOV 1665 calls i.e. you are doing a 1640/1665 debit spread. Two weeks out is still a bit long for me to come to that sort of conclusion though.
Depending on the number of lots you can end up turning your credit spread into a butterfly (unbalanced) where you actually make your most money near the short strike (more than the initial credit from the credit spread). I haven't checked the prices but due to the width of your spread you might not actually get much credit for the 1665 calls so this may or may not be a viable strategy. Discussions on the width of spreads have also been undertaken on this thread so I won't reiterate here. Just remember you can do this incrementally as the index moves up, you can buy more and more 1640/1665 debit spreads to turn your credit spread into more of a butterfly. Indeed if you go all the way (and sell all of your 1665s) you will end up with a bull call spread which might be what you want if the index blows right through the top. You can of course reverse the process if the index moves down again. You have to look very carefully at the costs of doing this as it might all be prohibitively expensive and not really justified.
Once again, there is more than one way to skin a cat and this is just one.
Note to self: I really have to learn the concept of brevity.
Momoney.
I'm not Coach obviously and I'm sure he'll answer this for you in due course. In the mean time, here is a second opinion worth about as much as the paper it's printed on:
Ask yourself this: if you didn't have the credit spread on, would still you go long the DEC 1640 straddle that you are proposing?
If the answer is yes, and you think the NDX is going to move up or down fast and you think volatility is likely to increase then go ahead and buy the straddle as a completely different strategy based on your market sentiment. Manage the credit spread separately i.e. take it off if it no longer fits your sentiment.
The credit spread wants the underlying to sit still (become less volatile) or move down. The straddle wants the underlying to move fast (become more volatile) in any direction. These are two different strategies. Which one do you want?
If the answer is no, then are you buying the straddle to somehow defend the credit spread or more specifically the credit $ received?
This is where it get's complicated. If you are buying the straddle to protect or defend the credit spread then why are you buying the put? The put is bearish and your credit spread is already bearish. That's a lot of -ve deltas. If you're really bearish then you've nothing to worry about, the spread will be safe and there's no need for the call.
Things are further complicated by the fact the straddle is in a different month to the spread. This could indicate that your sentiment is different in the medium term than it is in the short term but based on what you wrote, this is not the reason you want to buy the straddle in a different month.
I don't want to put words in the mouth of Coach but his adjustment approach seems to be based around the credit received from the spread i.e. being prepared to use some of the credit received from the spread to finance some insurance to further "hedge" the position (let's not forget the spread is already a hedged position) e.g. if you received $10K for the spread, you might be willing to spend $2K on a hedge which under the right circumstances would make enough money for you to help close the spread you had on or possibly roll it up. If the hedge is not needed then you've spent $2K on insurance for which a claim was not needed. Furthermore, Coach and co. seem to prefer to buy hedges on separate but related instruments - perhaps for price or clarity.
Reading the last paragraph is perhaps the reason I do not personally take the same approach. Indeed, if you ran simulations you might find that you come out just as well or better by not buying the hedge insurance and simply adjusting or closing without it - but that's another story!
Looking at the strategy from the point of view of P/L of the credit received is certainly a valid approach but you may want to take a different approach: one that is based on your market sentiment RIGHT NOW. Forget your credit. What position would you like to have RIGHT NOW? Do you have it? If not, how do you metamorphize (sp?) your current position into one you do want? How much does it cost? Would you pay that much for the new position if you didn't have any position to start with?
These are not new concepts and are certainly not original thought by me. More here: http://www.riskdoctor.com
What this means is in your context is that you may end up paying more for an adjusted position than the initial credit you received but you could also end up making much more than you would have. This might be a hard strategy for some people to adopt but why keep a position on that no longer fits your sentiment.
After all of that philosophizing, I'm not sure I've added any value to this thread or to your question.
The two approaches are not neccessarily mutually exclusive. As has been discussed many times on this thread, there are millions of ways of adjusting credit spreads and it really depends on what you think is going to happen.Consider this one for your current spread if you think the index is going to finish somewhere very near your short strike THIS MONTH (is that what you think?): rather than buying the DEC 1640, you could buy the NOV 1640 and bring the cost down by selling one of your long NOV 1665 calls i.e. you are doing a 1640/1665 debit spread. Two weeks out is still a bit long for me to come to that sort of conclusion though.
Depending on the number of lots you can end up turning your credit spread into a butterfly (unbalanced) where you actually make your most money near the short strike (more than the initial credit from the credit spread). I haven't checked the prices but due to the width of your spread you might not actually get much credit for the 1665 calls so this may or may not be a viable strategy. Discussions on the width of spreads have also been undertaken on this thread so I won't reiterate here. Just remember you can do this incrementally as the index moves up, you can buy more and more 1640/1665 debit spreads to turn your credit spread into more of a butterfly. Indeed if you go all the way (and sell all of your 1665s) you will end up with a bull call spread which might be what you want if the index blows right through the top. You can of course reverse the process if the index moves down again. You have to look very carefully at the costs of doing this as it might all be prohibitively expensive and not really justified.
Once again, there is more than one way to skin a cat and this is just one.
Note to self: I really have to learn the concept of brevity.
Momoney.
