Managing Vertical Spreads

Discussion in 'Options' started by Spaghetti Code, Dec 9, 2021.

  1. When you have a [bull] Put spread, and the market goes against you, what ways are there to salvage the trade?
  2. JSOP


    1. You wait to see if the market reverses and trade goes in your favour until expiration or margin call whichever comes first


    2. You close out the losing short leg and sell another put that's more reflective of the changed market situation


    3. If you really think the market has completely reversed the trend and is really going south, buy another put or sell a call spread.

    Regardless of the situation, you need a plan first to spell out what to do under which scenario. No matter what, do NOT panic!!
  3. Zwaen


    No one can give a straight answer to this. Basically you are asking: "When I am net long, and my underlying instrument is decreasing in price, what can I do ?"

    Some considerations:
    - Important one: does your bias of the instrument future price changes with this new information? And if so, in what way?
    - In what 'way' the instrument decreases
    - Do you have some statistical analysis of the way your instrument 'moves' ?
    - what is your spread?
    - what is the price of the instrument?
    - what's your max loss, and how big part of your portfolio is it?
    - what other trades are you running, and what is the correlation between them?
    - etc etc

    Otherwise it is just best to close out the trade.
  4. ZBZB


    If it is a stock then you can take delivery and sell a call. Search the wheel options trading strategy.
  5. Let's say I have -1 SPY@450, +1 SPY @445. If SPY goes down too much, selling the 450 leg and buying back where? Selling below 445 makes the trade bearish. It seems like I have to move both legs.

    I am trying to play averages. Without being too specific, I usually trade spy/qqq and sell OTM puts (or buy equivalent deep ITM calls). I am using historical data to estimate likelihood of success. The spread is usually between 1-5$ Price is usually around 4-7$ to enter, and I try to exit by 50% max profit. I dont have any other meaningful assets in this portfolio, just trying to practice with small potatoes first.

    The main problem I am having is if the market is down, but I still believe in my prediction, what repositioning can I do? (or convert it into a some other play?)

    Good point. In my case I don't want to tie up that much capital. The tickers I trade are usually higher price, so I would have to tie up a lot of capital. (I did try wheeling just after the crash in March 2020, but I ended up losing money).
  6. JSOP


    Ok are these puts? I assume these are puts. If these are puts, I wouldn't touch the long 445 leg if I were you. If the market is really going down south, that long 445 leg will be increasing in value and even go ITM. You will be counting on that to earn back some of the losses so why would you sell it? There is nothing wrong with selling a new put below 445. If the market is going down, then it's bearish and you go bearish with it. Remember you always trade with the trend. I would sell a new OTM put with a strike that I don't think the market will reach and then just sell the long put when you think the market has bottomed out or before expiration whichever comes first if you don't want to take physical delivery. For the new short put, you do the same thing as with the old put. If the market continues to tank, you either wait it out to see if reverses before expiration or you close it out if it tanks past its strike and consider if you want to sell a new put with a new lower strike and the same process happens again. If the market goes back up, then you don't need to do anything but collect the premium or close it out if you think you've made enough money and/or covered enough or all of the losses.
  7. Zwaen


    To keep things very simple: you only play for delta moves. You set up an otm putspread 445-450 because you think spy will never reach 450 and both puts will expire worthless. Price moves to 452 and your getting a little nervous. BUT you still believe both puts will expire worthless. From a price/instrument point of view you are given a new opportunity, spy will move up from here. I think it is best to just set up new trade where you can trade that new proposition and let the other spread 'play out'. This just to mitigate transaction costs.

    Other from that, I think it's just next to impossible to give profound advice. There a lot of variables involved and a plethoria of possible outcomes, and just adding 1 or 2 can make it much more complex. It is very easy to say just convert it to option combination x but this all depends on a vary of factors.

    All in all, I think it is best to treat the 'dip' as a new and independent situation from your first trade and go from there. So IF you think the probabilities for spy to rise are substantially increased, set up a new trade for it, keeping in mind that you 'doubled down' and are going to add risk. It is best to think out these scenarios before you enter the first trade to minimize the impact of emotions.
    Flynrider likes this.
  8. If the spread is still Theta positive it's worth hanging in there 9 times out of 10. But if you're Theta neutral or negative then leg down (and / or out) as you're not getting paid for the short Gamma risk.