I mentioned this on another thread I started: http://www.elitetrader.com/vb/showthread.php?s=&threadid=69124 I didn't know whether to reply to that thread or start a new one. I thought I might get more input on a new thread. To recap: I wrote a 32.50/30 put credit spread on EBAY for May. EBAY has now tanked to 30.28, so it looks like I will be buying the stock this weekend. If I wanted to try the strategy posted by cnms2 (i.e. now sell a straddle) which strike price should the straddle be? I'm thinking 30/30 (depending on the PPS on Friday). Should I enter the straddle late on Friday? Also, If EBAY drops below $30 do I need to sell the long leg on Friday? If I don't will it be assigned automatically, thus giving me the max loss on the original spread? I know if I don't have any protection going into the weekend that EBAY will announce bankruptcy, all the officers and BOD members will be arrested, earth will be hit by asteroids, Bush will start bombing IRAN ... well, you get the idea.
I think that your best bet is to close your spread tomorrow morning for whatever you can get and look for a brand new position, in EBAY or other. Reason: your long 30 put being at the money has still some premium that will drop vertiginously in the next few days. If you plan to open another EBAY position don't decide on it based on your past loss or gain, but look at it objectively: what's your forecast for EBAY's price and implied volatility? Before opening any position make a trading plan for that trade considering all the possible outcomes, and decide beforehand what you'll do in each case. Once you opened your trade execute your trading plan, and resist any temptation to change it. Good luck! PS: If your forecast is that EBAY will bounce up by the end of Friday you should proceed accordingly. There's some support just above $30, some indicators (i.e. MACD histogram) show bullish divergence, but during the last few days the price went down on increasing volume (which can also be a selling climax). So ...
Yeah, maybe I should close it. I was looking for support at around 32. It started up this morning then tanked. Thanks.
I really like this advice. Blindly making a trade to compensate for a loss is generally revenge trading and just results in compounding losses. Whenever you adjust or close a position, it should be based on your current view of the underlying. If you are still bullish on EBAY you might consider rolling out and even adding a bit if you are really bullish. OTOH, if you are no longer bullish on them, then closing the position and looking for something else is the better trade. Always, re-evaluate the position before you change it!
I closed it for a loss. I don't plan to trade EBAY in the near future. I guess the lesson is don't expect a stock that has been dropping like a rock to stop for a week until your options expire. Like I mentioned earlier I was looking (hoping) for support around 32. Heck, it will probably climb back up tomorrow or Friday. I am waiting for the weekend to start a free trial at PowerOptions. I find it too tedious to screen for good option plays. cnms2, weren't you the one who posted the flow chart? Under what circumstances would you do step 2, sell a straddle? Maybe on a stock that shows a little more life than EBAY? (BTW, I would never sell a naked put. I would always buy some downside protection.)
I think you did the right thing closing your position. There's a saying: when in doubt, get out! I hope you got out first thing this morning ... I posted that flowchart because you asked about the systematic writing. I traded that way only for a short period long time ago, but currently I'm mostly a premium buyer. Systematic writing, as any other options strategy, cannot always be applied successfully on any stock, in any market, any time. You have to use the appropriate strategy for your forecast of the price and the implied volatility. I know that there are "gurus" that sell "one size fits all" strategies, but I still have to see one that delivers. Theoretically, it doesn't exist.
(I went back to edit the post, but I guess I waited too long.) I was going to change it to "good or bad", after my EBAY experience. In fact, that's one of the reasons I did the spread with EBAY. I checked all the usual suspects, MSFT, GE, IBM, INTC, GOOG, YHOO, etc. They all had low premiums. Then I checked EBAY. I took a quick look at the chart and pretty much ignored the long term part of it. It had traded around 32 all day on 5/11. I thought "Expires in a week, what could happen? It's EBAY after all."
cnms2 wrote: "Once you opened your trade execute your trading plan, and resist any temptation to change it." Cache Landing wrote: "Whenever you adjust or close a position, it should be based on your current view of the underlying" So which is it? Stick to your plan/stop losses etc. or fiddle with the position depending on your "new" view of the underlying? daddy's boy
well, that's not every1's view...a very well known fluff...ehmm poster says that if in doubt, there's no doubt, hee hee...i leave u to get to u conclusion 'bout who this fella might be...