Would love to hear suggestions on ways to prevent buying back vertical spreads when IVs are jacked up. Scenario: I've sold a vertical put spread, and when markets are closed, the underlying moves down a lot, maybe more than 1-std deviation. When the market opens and in the first 30 mins of trading, the underlying hits a point where I have to close out my vertical spread by buying it back, or I risk losing more than I'm prepared to, what are the various ways I can take to delay buying back the spread, until IVs drop to a more reasonable level? If it could allow me to delay buying it back without suffering further losses for about 1 - 2 hours, I think that would suffice. Going short futures is one, but that requires a lot of margin. What other methods can I take to avoid buying back my spreads at crazy IV levels? Thanks!
Bold part: trade what you can afford to lose. On your question: buy half the short side back at a loss; you will now be long vega. Keep in mind that short verticals can wipe you out if deltas move from .10 to .90.
Usually I try to sell put vertical spreads after recent upticks of IVs, but as the past couple weeks have demonstrated...the IV could just keep going higher and higher. In such instances, even when you think you're pretty safe at a certain distance, I would go out even further so you make less money overall but you also can withstand huge jumps in IV (such as the past couple weeks). Another thing that I have done, but am not sure is the best thing, is to by a call vertical to turn it into a iron condor...I only do this if there is a short rally while the IV is still super high so calls are pricier and can get larger premiums...this helps withstand a little cuz I usually go pretty far out on the call too and get the delta to be pretty close to neutral...then I just manage both sides as the market moves...I pretty much did this exact thing for July NDX and came out fine this month hitting both of my target profits for puts and call spreads, even though I had to wait over this past wknd to collect on the put spread....usually I look to get in and out of a put spread within 3-5 days...but it is what it is
matador, thanks for the input. What I meant by not wanting to lose more than I'm prepared to, was before entering the trade I have a maximum loss that I do not want to exceed for that trade, otherwise it messes with the expectancy of my method. It's my risk management point or stop-loss of sorts. Thanks for the suggestion, I'll try it out. One question, if I bought in half the shorts at that inflated IV (without the benefit of being able to sell my long further OTM options at the same inflated IV), do I really want to be long vega? Because when IVs settle down after the first 30mins of trading, as I've seen them do, I'd have locked in a loss from having to sell out at those spiked IV? (The IVs were mostly jacked up because of the huge overnight move in the futures). Again, appreciate the input, it's good to look at it from all the angles and be able to choose the best solution. Thanks!