How to end the Credit Put Spread saga

Discussion in 'Options' started by coldplay_option, Apr 11, 2019.

  1. Hey Folks,
    I have a Credit Put Spread on BAYN with 5 contracts of 64/62 Put Credit Spread expiring 17th May @ 0.7 euro credit (i.e max loss 650 euro).
    Stock went down then started moving up a bit hence did not adjust but now increasingly looking to tank further. Currently trading around 60 euro (i.e both short and long are breached).
    Sounds like I have a "Do Nothing" (and suffer) situation
    Any other views please?
    Any further complication if assigned esp between the Put strike prices?
  2. How much is the 64/66 Call Spread going for?
  3. JSOP


    C'mon, it's just 650 euro. You gotta live a little. So if I were you, I will just do nothing.

    If you really see the stock tanking further and have no way of going up by May 17th then you can try to exit the short leg and then try to profit or mitigate the loss at least a bit by letting the long leg run a bit longer but the risk with that is if the stock subsequently rebounds and starts to go up after you've exited the short leg then you will end up with double the loss, lot larger than 650 euro. May 17th is more than a month away. A lot can happen still.

    Good luck!
    ironchef likes this.
  4. 64/66 Call is around 0.28 - is it worth considering?
    Thought of closing the short leg but there is earning and major announcements ahead so sounds risky as well.
  5. ironchef


    Here are the logics from an amateur option trader's perspective:

    1. You wrote the 64 put as a bullish bet.

    2. You capped your downside risk by buying a 62 put. But by doing so you capped your up side also.

    3. You should have a reason to select the 64/62 and the duration, e.g., your opinion of what the underlying should be near expiry.

    4. If your opinion is wrong, perhaps the best strategy is to exit, salvage what you can and move on to the next bet? After all, adjustment is no different than closing out your position and place a new one.

    I have been studying multiple-leg options since 2015 and have not found a good way to trade them profitably, consistently, because whenever my bet was correct the limited gain messed up my overall profitability.

    Perhaps someone else here can help both of us out.

    Good luck.
  6. Turning your trade into a fly is a way to start conceding defeat (on this trade) but still salvage a few cents leaving the possibility open that you could still scratch the trade later on. It doesn't use any additional BPR so that's an advantage.
  7. Epicurus


    The answer is to close the trade. Exit.

    This should be a simple trade but I've struggled to work out what's going on from your info. Is the "60 Euro" a typo? If it was 600 it would make more sense.

    I was testing these Bull Put as well as Bear Call credit spreads a little while back and found them really forgiving. The max loss doesn't occur mostly until late in the trade towards expiry (unless SP has gone a long way against you) and so with 5wks to go you can get out of this trade fairly cheaply. These spreads if put on 5-8wks out seem to give you a week or two to have a look at direction with a low cost to exit, as long as you take it off when wrong.

    I look at these as a portfolio or series of trades rather than in isolation:
    So capital at risk is max loss of Euro650
    Credit of Euro350 gives a 54% return on capital if correct.
    Currently your loss (if price is Euro600 less 350Credit) of net Euro250 is 38% of capital as you're wrong. Great.

    Over a series of these trades if you win more times than you lose guessing direction, you have some technical edge. If you can then get a higher return on capital for a win than the average capital lost on your losing trades, you'll have a very profitable system.

    Summary, you appear wrong on direction and your loss on capital % is still less your profit potential % on the trade, so you close it. Then put the next trade on. Then the next one. Then the next one. Etc. Then if you have a genuine edge in selecting these types of trades you retire a millionaire.
  8. Thanks. Really helpful tips
    Just to summarise with new info
    64/62 Put Credit expiring 17th May; Bought for 0.70 i.e risk rate is 1.33.
    Share Price has moved up to 61.73 (go figure considering they have 11000 court cases against them but they have strong fundamentals!). Earning to be announced on 25th Apr.

    Option 1. Converting to Fly by adding 64/65 Put will cost extra 0.98 mitigating the max loss to 0.28 (0.98 - 0.7 right?) + all commissions. Max profit is nil considering comm.
    i.e Total loss = 140 euro + comm.

    Option 2. Current market of the 64/62 Put Spread is 1.53. If I close now, realized loss = 415 euro + comm

    Option 3. Do nothing means still exposed to max loss of 650 euro + comm.

    Considering Earning around with the surprise trend up, should I still stick to Option 3?

  9. Epicurus


    Yes, those would seem the available alternatives on todays price.

    Your last sentence seems an odd question.
  10. I meant should I act before the Earning event or before?
    BTW, I believe option 2 Max Loss is higher considering the implicit loss incurred so far - currently standing at 0.81. My assumption is my max loss will stand at 1.79 (.81+.98) totalling 895 euro.
    There will be no profit realizable with the Fly.

    Can someone please confirm if it sounds right?
    Thanks again
    #10     Apr 16, 2019