Repair of a broken bear call spread?

Discussion in 'Options' started by wartrace, Jul 12, 2009.

  1. wartrace

    wartrace

    I have a bear call spread that went into the money by 1.82 & it expires in July. It was a very stupid trade in AIG- Yes I know it was very stupid to play with this stock & I screwed up big time (feel free to abuse me if you REALLY feel the need to- I can take it)

    I sold the 10 call and bought the 12.5 call for a credit of 520.00.
    A complete loss of (2500-520=1980) will not kill me as it is less than 3% of my account.

    The way I see it I could sell a put spread (-10 +7.5) and use the credit to offset my loss on the call spread.

    I could sell a naked call at 10 and offset the loss even further than a put spread.

    I could just buy back the short call and "hope" the stock keeps rising enough to profit on the long side of the spread.

    I could do nothing and hope for the best. :)
     
  2. What was your exit/management before you entered the trade in case this happened?

     
  3. Number 1 rule: don't send good money chasing after bad money...

    Whatever you decide to do, you need to see it as a completely new trade. If you try to catch up on a bad trade you may very well dig yourself deeper. If you transform this into a iron condor, then make sure the main reason is that the put spread would have a good R/R NO MATTER what you may loose on the call...

    If you really want to do it, roll over your spread to the next month I guess with a higher strike - especially if you think the stock should not be as high as it is right now.
     
  4. wartrace

    wartrace

    That is the "learning experience" portion of the loss.:( I really didn't have an exit strategy. I probably deserve to lose the money as my tuition for doing stupid.
     
  5. My advice is the same as heiasafari. Look at it as a new position? Would you still do it then?

    There is nothing wrong with a losing trade.
     
  6. wartrace

    wartrace

    Nothing wrong with it other than that pesky losing money thing:p

    I hear you though, if I can't handle losing I shouldn't be trading. I just have to watch the "impulse trades". This is my first real loss(newbie), it was also the first I hadn't put a whole lot of thought into.
    Live and learn:)

    I will take your advice though, I have to avoid "revenge trading" and look at any attempted repair as a new trade.
     
  7. 1) You must expect to lose money part of the time. You know you cannot win them all.

    2) Your major path to long-term success is to be certain losses are reasonable and that none of them really hurts.

    I don't think it's a good idea to shrug your shoulders and say 'it's <3% of my account." It's still your money and you should try to make the best decision you can make. Forget the future results. Do you want to own the current position? If not do something.

    Agreeing 100% with others - whatever you do - be certain you own a position you WANT to own. If you cannot adjust the current position so that you want it, then simply close and move on.

    3) A decision to make a trade is not 'stupid' just because it loses money. It's stupid only if it's stupid - as in 'there were plenty of good reasons for not making the trade.'

    4) As you already realize, revenge trading doesn't work.

    Your goal is to take your current account and hold positions that will help you earn money going forward. What's past is past.

    People develop their own investing philosophy, and while you are developing your, consider what others are saying. Accept what you believe is good advice and ignore the rest. Eventually, you will be comfortable making all decisions.

    Mark
    http://blog.mdwoptions.com
     
  8. wartrace

    wartrace

    Thanks Dagnyt,
    I've done real well with the index options so far but these individual stock options are not working out as well for me. I am going to stick with index options for the time being and try to work on my individual stock options. I've only been at it for a month & am still up overall despite my best efforts to lose money:D

    I'm spending a lot of time watching the behavior of the S&P during the day, maybe I should be watching a select few individual stocks to see how they trade during the day.

    I really appreciate that you & the other posters take the time to respond to a newbie. Your taking the time helping a total stranger is awesome.

    :)
     
  9. You've gotten some good advice so far. The only thing I'd add is that you need to draw a line in the sand BEFORE you get there. The number is up to you. It may be 20%, 30% whatever but when you have that percentage loss, it's time to re-evaluate the position (close, adjust, roll).

    The other line in the sand is the strike. While you should be watching daily, penetration of the short strike is time for serious thought. Once ITM, delta really starts to increase and the losses accrue faster.

    The other problem with ITM is that if you get far enough in, not only is it possible that you're buying back a lot of intrinsic but you may have no possibility of rolling horizontally (if so inclined) w/o having to go out more months to find some time premium ... ITM time premium can be minimal on near month strikes on lower priced stocks. Then you're either married to the loss or to long term hoping that things will reverse.

    And as others indicated, adjustments are done because you like the new position today not because you're trying to break even.