I am an admitted options novice trying to gather how professional options traders work into and out of positions. I have the following question: Assume I have a 2:1 ratio put spread (18 days to expiry). I am long the 48 strike(1) and short the 45 strike (2). The underlying is currently trading near 51. The current p/l of the trade is currently above its its payoff at expiry (assuming the underlying stays above 48 at expiry). Obviously the maximum payoff is at 45. 1) Would you leg into a riskless fly (buy back the 42 strike) and take a riskless 1/3 the current open p/l of the trade for the chance of a 7x payoff if the underlying goes out at the 45 strike? 2) Would you close the position and take the open p/l? 3) Would you do something else? If this is not enough information I will be glad to share more details. Thanks in advance for responses. Bevo

1) Would you leg into a riskless fly (buy back the 42 strike) and take a riskless 1/3 the current open p/l of the trade for the chance of a 7x payoff if the underlying goes out at the 45 strike? Sure, offstrike flies are an excellent way to simulate much of the behavior of a ratio spread and with limited risk. Absolutely take some profit if it's on the table and you are starting to feel "uncomfortable" about the position. Also, you seem to have your eye on the max payout of the proposed butterfly. There should be a range of profit in there for you to consider, not just that 7x sweet spot. 2) Would you close the position and take the open p/l? If you did not have the position on already, would you put it on now at the stock and options prices you are observing today? 3) Would you do something else? Ratio spreading is serious business that can result in serious losses unless you manage your risk carefully. Offstrike/unbalanced butterflies or using bull and bear verticals in unequal quantities, etc. are safer ways to play that game. Positive theta good, open-ended and/or oversized risk bad. Also, the general problem of how to adjust an options position is implicitly part of your question. There are so many ways to adjust it or transform it into something else. You ought to consider ahead of time the possibilities. Putting an options position on initially is just the first step.

One other reason for doing something: You have the good profit and are naked short one ITM put option. Isn't that a riskier position than you want to own - considering the most you can gain and the risk involved? Mark http://blog.mdwoptions.com/

Thanks for your responses. I am not sure I gave a perfect overview of my situation or my understanding of the risk. 1) I am currently in the trade. its a +15 Jul 48/-30 Jul 45 (thanks for the correction on terminology) that I put on for a .43 credit and is now trading at ~ .03 debit. 2) I am not focused on the max payout at expiry, I was just trying to generalize the risk/reward of the trade. I understand that the best course of action, assuming I could model the ACTUAL return distribution of the underlying, would be to make the decision with the highest expectancy. I am still going to attempt to model that before I make a decision...I was just curious for a more experienced opinion. 3) I understand that the trade is not "riskless", as I would be spending ~ $330 in p/l to leg into the fly. I simply meant that given my current cost basis, the max loss (assuming I leg into the 42 strike fly) would be ~ +320. 4) I guess the answer depends on my expectancy of the underlying at expiry and the associated probablities I assign to the outcomes. I was just curious if anyone had any other ways of trading around an in the money ratio spread.

Hi Mark, I am naked short 1 OTM (45 vs 51 underlier) Put option, but since it is on an individual name and not an index the risk v gain does seem a bit much. Given my estimate of the distribution of the underlying and other factors leading into the trade, the trade had positive expectancy and the max payoff was set to my higest prob expectancy of the underlier at expiry.

If you put the spread on 15 times for a .43 credit, you pulled in $645. Spending $300 or so to buy the 42p gives you a butterfly for less than free. Below 42 or above 48 your max "loss" is still a credit. In between 42 and 48 you get the white meat. Whats the problem? Maybe close half of the position, and then buy the 42p for a free butterfly 7 or 8 times instead of 15.