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Old Feb 22nd, 2007, 03:01 PM   #1
torontoman
 
 
Join Date: Apr 2005
Posts: 314
Does anyone have any ideas on how to repair a credit spread when it's beginning to look bad?

Thanks in advance,

Torontoman
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Old Feb 22nd, 2007, 03:02 PM   #2
damon_achey
Registered User
 
Join Date: Mar 2005
Location: Co
Posts: 164
Buy it back.
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Old Feb 22nd, 2007, 03:24 PM   #3
RichardRimes
 
 
Join Date: Oct 2005
Posts: 3,126
need a lot more details. Sometimes selling the other side creating an IC then rolling up works..the problem with adjustments is your trading one set of problems for a potential new set, often getting yourself deeper in the hole. If you sold because you were negative on the equity (assuming its a bear call spread) then you need to re-evaluate your assumption and decide if you were flat wrong then just close. If you still believe your assumption is valid then sometimes using a B-fly to roll up a strike for minimal cost saving the majority of the credit. However if you are wrong then the costs mount.

Stocks are pretty clear cut if the spread goes bad just close it, however on indicies sometimes you can fade the market and time your adjustment which can work out ok.
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Old Feb 23rd, 2007, 09:13 AM   #4
OptionPundit
 
 
Join Date: Nov 2006
Posts: 14
There are several ways how one can adjust a credit spread that has turned bad....buyback, converting into a fly, using a sligshot hedge, etc. It also depends on what price did you start, how much time is left, etc. You may wanna share more details about the trade so get some suggestions from this wonderful forum,

Profitable trading,
www.OptionPundit.net
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Old Feb 23rd, 2007, 09:16 AM   #5
MTE
 
 
Join Date: Jan 2005
Posts: 3,342
Any adjustment to a losing trade will result in an even worse risk/reward ratio so just close it out and move on.

Model the adjusted position and then compare it to the market price of that position and you'll see that you'd never even consider such a trade in the first place so why should you treat an adjustment differently!?
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Old Feb 23rd, 2007, 09:55 AM   #6
torontoman
 
 
Join Date: Apr 2005
Posts: 314
Here are the details. BTW thanks in advance.

last week, NTRI gapped up on earnings & guidance big time. It closed up 13.5 % to 49.79. The next day, it fell a bit, so SOLD the March 45 put for .90 and BOUGHT the march 40 put for .3. The bid/ask spread for both of them were the tightest.

The stock kept on falling and falling. Yesterday, I saw the stock go down to 45.10. The put that I sold was trading at 1.85. and the call was at .4.

My original exit strategy was to short sale NTRI if it got to 44.40 to hedge any danger. But I became inconfident with this strategy.

Any comments?

Thanks,

Torontoman
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