Quote from optioncoach:
Well nice spike down through support and I wonder if this fortells continued moves lower. I have been playing around with different ways to limit potential losses on the MARCH - 150 SXP 1185/1195 put spreads and we have discussed PREGO FLYs.
The other adjustment not discussed is boxing the spread. In other words, rolling the bull put spread into a BOX spread by selling the same strike call spread. This way I would be short the box and the maximum loss is capped at the difference between the strikes minus the premium received * number of spreads.
I was toying with this idea all morning to lock in a limited loss and then find more spreads to sell OTM if the market keeps falling. After playing with the paper for an hour or so and comparing rolling into PREGO FLY which would have resulted in a limited loss over $20K but with the potential for huge returns should the market really fall far or boxing the spread and locking in a limited loss now until expiration, clearing up margin and looking for new spreads to enter for MARCH, with at worst a small loss for the month.
Well back and forth I decided to feel the box out since the loss would be limited and easily swallowed and I would be able to recoup it with more spreads potentially.
So today I sold - 150 SPX MAR 1185/1195 Call Spreads @ $9.00. Remember I sold the SPX MAR 1185/1195 Put Spreads for $0.40 so I am short the box for $9.40. (Tried to improve upon $9.00 price but MM were not having it). The maximum value of the box is $10.00 so the locked in loss is $0.60 or ($9,000).
Adjusting the spread down would involve a small cost but still involve a loss though smaller than the box but still leave me open. This way I can get out of the margin risk and still enter a new position if the market drops at better prices.
If the market keeps dropping I will sell more OTM spreads (have an order for the MAR 1165/1175 now) to bring in more premium to reduce the loss. So I went from a $150,000 exposure to $9,000 loss with the ability to reduce that further.
If the market drops and shows some strong support I could always buy back the call spread for less and make a profit there and then face my put spread again. But as time passes the box expands to full value so it really depends.
Why did I do this? Because paper is only good for so much. I needed to work through this in a real trade scenerio to play with the numbers. Also it is a small loss to take this early on and worth it for the risk reduction. I know I am still 60 points OTM but the technicals are turning down and a large shoe could drop soon if Iran starts up and drives oil higher.
For you, think of it is an education at my expense. For me, I have no problems anymore in my put spreads so they are clear and my FEB 1205/1195 is safe with just over a week to expiration. That is a $5k profit and I already banked $4,500 for the year in January so my worst case scenario now is I am flat for the year in MARCH with the market pretty much flat too.
Risk Management folks.... better to be flat taking a small loss than deflated taking a huge loss. Not to mention I still have MAR opportunities to take in more premium.
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