Hello: I am trying to get some suggestions to salvage a vertical spread. I initially had 116/119 bear call spread on SPY. I rolled to 118/121 when SPY rose past 114 on the employment report. There was a loss on this rolling. Yesterday when SPY rose past 117, I closed out the spread with more loss, even though my calculation showed a very low probability that SPY would reach 118 by Friday. With SPY slightly down today, I am thinking maybe I shouldn't have close the spread. Optioncoach has a vertical spread thread. His ways to salvage a vertical spread include rolling up or down, buying calls/puts. Some people convert the spread to a butterfly. Anyone care to discuss the pros/cons of various creative damage control? Thanks.
your short the 116 call and long the 119 call, you short the 119 put and buy the 116 put, now u have a box ,( short 1 diagonal,long another).that willl always be worth 3,then you scalp in and out of the legs for 5 and 10 cents til its back up over 3 ,or cover the 116 calls while rallying and put them back out when we reach the next resistance, when dow hit yesterdays hi this morning you cover the 119 call and put it back out when we drop to 57 on the es, or cover the 116 calls down there and now you need to leg out of the put sprd, if your call legging amounted to u buying the call sprd for 1 1/ 2 and the put sprd is now 1 1/4 u just buy it back and u are out of the position at 2 3/4 , you can always sell the same put sprd and u have a box that wont move in value, i f spy is at 120 the call sprd is worth 3 and the put sprd zero, if spy is at 112 the call sprd is at zero and the put sprd is 3....you can use this box tool to always lock up your position overnite or during sideways action , or you scalp in and out of 1 of 4 legs , whichever seems at the money and reacting the most to the market at the time,volume wise
There is no such thing as salvaging. In your case you had a short delta an were wrong. Rolling,adjusting or salvaging is just a readjustment of your delta and you have a new position with a realised or unrealised loss.
.....""no such thing as salvaging"" ...amen, i never understood all the happy talk about adjustments, if something moves against you, your original plan was wrong. ..... your trade plan going in needs to have an EXIT for that.
I never understood it either.. It is usually the nonsense premium sellers spew when their position goes against them.They rolll down/up/out/out and up/out and down...All this to "avenge" their initial trade going against them. If they are lucky,2 rolls and 6 months later they have salvaged their position and broken even..
generally, i don't trade verticals. however, on the rare occasions that i do, if the trade goes against me, i will quicky convert it into a butterfly....and if i am really stubborn i will hedge my deltas by turning the trade into an iron condor. from my experience, you should not adjust more than 2 times. just admit you are wrong and move on.
This is probably the best answer. Another possibility is: roll them way out in time. The truth is that there is no really great way to adjust these. The condor or butterfly at this point is one answer. But you clearly would have been better off with such a position in the first place. That is the nice thing about birds--there is a winning side and a losing side. With a directional trade that goes badly, you only have a losing side. This is only one person's opinion. My technique with verticals is to determine a percentage at the outset that I'm willing to lose, and exit there. The key to avoid going down in flames is not to be a pig at the beginning of the trade. To maximize the possibility that any losses can be kept within my allotted percentage, I often use more conservative verticals, such as ~5% in the money bull call spreads, restricting them to a small part of my account and to times when market conditions favor such trades. There is plenty of money to be made in these things even when using conservative strikes and trading only in the best market conditions.
drcha, ...i like your post also, makes me think outloud something that i will take a closer look at on paper, but let me ask you in case you have looked into it... probably at the time the op did his bear call spread on spy i did a bull put spread on spy, a mar 100/103, which should expire at $0 on fri. i didnt want to do a full ic, i felt there was too much up side risk to enter a bear trade. i have been only doing the bull side verticals on spy since aug last year. all have been winners, didnt do a trade for feb expiry, i couldnt find one that met my rules, so that worked, as i avoided that dip in jan. getting closer to my question, ...i felt that i was leaving money on the table because i was not doing the other side of the ic, but my market outlook was bullish and i didnt want to do a bear trade... ...BUT, what if i had done BULL call verticals in ADDITION to the bull put spreads i was doing....i will think about it...