Forums - long bull call spread, what to do if stock falls below break-even

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Posted by cqm on 03-29-12 03:35 AM:

long bull call spread, what to do if stock falls below break-even

Hello, how exactly do you manage a long bull call spread when the stock falls below your break even point?

I've seen all sorts of great strategies for when stock moves higher too soon before expiration (rolling up)

but do you avg. down? roll down? close the short leg? buy more longs and unbalance the spread? accept the loss because the point of the bcs was to minimize risk?

I don't expect a "simple" answer because I usually see an entire article about advanced strategy management, but I haven't seen anything for what to do when the stock moves against you in a BCS

Posted by rmorse on 03-29-12 03:42 AM:

The answer is not simple. What I would do is constantly evaluate the spread. If you still like it, and would buy it here, you can buy more. If you feel like you made a mistake for other reasons besides the stock did not go you way, dump it. Move on to the next trade. The stock dropping below breakeven, should not have great weight in the decision. If you buy a call spread, you have to feel the stock will go up over the time you've allotted, not in a few days.

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Posted by cqm on 03-29-12 03:57 AM:

Quote from rmorse:

The answer is not simple. What I would do is constantly evaluate the spread. If you still like it, and would buy it here, you can buy more. If you feel like you made a mistake for other reasons besides the stock did not go you way, dump it. Move on to the next trade. The stock dropping below breakeven, should not have great weight in the decision. If you buy a call spread, you have to feel the stock will go up over the time you've allotted, not in a few days.

lets think Weeklies

long 1 atm, short 1 strike otm

stock moves very little, 100% gain, stock moves against you 100% loss.

unlike a long call, you don't have the issue of time decay for max profit. time decay actually works for you for max profit in a long bcs

stock moves up? you are good - like a long call

stock stays sideways? you are good - UNlike a long call

stock moves down, 100% loss - just like a long call

while below break-even-point time is not on your side, but it wouldn't be on your side in a long call, so just wondering if there is something else I haven't thought of

Posted by rallydog on 03-29-12 04:30 AM:

Re: long bull call spread, what to do if stock falls below break-even

Quote from cqm:

I don't expect a "simple" answer because I usually see an entire article about advanced strategy management, but I haven't seen anything for what to do when the stock moves against you in a BCS

Know your exit before you enter. A good trading plan would not have you asking what to do. Just saying.

Posted by Don Bright on 03-29-12 02:58 PM:

Re: long bull call spread, what to do if stock falls below break-even

Quote from cqm:

I don't expect a "simple" answer because I usually see an entire article about advanced strategy management, but I haven't seen anything for what to do when the stock moves against you in a BCS

Options answers are as simple as you'll let them be, or as difficult as you want to make them. Pretty evident that many on these threads simply like to discuss complexities, when there really are none.

What if you buy a stock and it goes down? You already should have a plan, a mental stop loss, another stock to pair off against, calls to sell against. Or just get out. You were wrong on that one trade, big deal.

Vertical money spreads, simply "hoping" the stock stays up over the bottom strike, and hoping it goes to the top strike, maximum profit. No big deal.

There are no magic answers to any of this. Stock trading is much more simple than options, and yet options are extremely easy to trade, just don't over-complicate things.

FWIW,

Don

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Posted by magicz on 03-29-12 05:32 PM:

if the stock hit my short strike on wednesday or thrusday. I'll book a lost and move on. too short of a time to "repair" or average down and "pray" it will stay above your short strike.

Posted by ExchangeRider on 03-30-12 11:50 PM:

If you entered at your maximum risk % based on your portfolio rules, then you might want to close at least part of the trade down if you aren't comfortable with taking a loss equal to the max risk.

If you entered below your max risk %, then you have some wiggle room to make an adjustment. Some ideas to consider if your directional prognosis remains include buying back some of the short contracts, buying more of the same spread (like averaging down), or placing a calendar or butterfly just below/at the money to put more time in your favor. It all depends on the situation (news, slippage, IV, etc).

Of course these ideas could over-complicate the matter. A good general rule is to use adjustments primarily for reducing risk or to lock in profit. All of these mentioned will add risk to the trade so be sure to stick to your individual trade risk limits.

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