Still puzzled about this trade

J

jim.thornton

Hey Guys... I'm still really puzzled about this trade. I posted a few days ago about a trade that I put on in a paper account and the market has reacted the way I expected but the put spread hasn't and I really can't figure out why:

Here's the trade I placed:
Vertical Put Spread
Date: Dec 3, 2015
Strike: 785/790
Expiration: Jan 15, 2016
Net Debit: $2.42
Current Ask: $7.25
Current Bid: -$0.30

What? How is that possible. The market has gone down as expected and the debit spread has not increased. The bid peaked to about $2.10 yesterday. I just don't understand why this is happening?

Initially I thought that maybe it's cause I chose a Jan 15, 2016 expiration date. But we're getting closer to the date so I would think that it would cause it to increase.

Does anyone have any suggestions? The other day I posted something and people said to stay away from TMX. I have done that now, but I still have this in the paper account anticipating that it would go up as we get closer to the expiration. How could it possibly be -$0.30 now?
 
The issues with debit spreads are Time Decay and the short leg which act as an anchor. I recommend just buying the long option and forget the short option.

I assume your position isn't performing as well as you hoped due to Time Decay.




:)
 
It's been since day 1 that it hasn't performed. I knew there would be a factor of time decay, but it's been like this since the beginning for some reason. I know the bid/ask was too wide to start, so I shouldn't have placed it but I figured with how much the markets have gone down in the last few days it would have at least turned a profit.

With an expiration date of Jan 15, shouldn't time decay be less of a factor than say a Dec 18 expiration?

The debit spreads help to reduce the potential loss though. Are they not more conservative than just buying a long put?

All of the other trades on the indexes have performed as expected, it's just this one for some reason. Mind you this is the only vertical put spread on TX60.IN that I did. (I forgot to mention the symbol).

Could it be because the TX60.IN is a European option and maybe the market doesn't believe it will stay below 785/790 all the way to Jan 15?
 
Maybe the market does not expect the trade to ever be profitable. That is to say, the underlying has not gone down enough, or is not expected to go down enough, to make the debit spread profitable.
Why don't you see if selling this same spread would be making money now, or not, according to the original entry prices. That at least gives you something to think about.
 
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