Nightmare on Put Street


I have 20 may 640/630 and 20 may 620/610 rut put spreads that were placed prior
to Thursdays doomsday. Felt fine at the time. Now showing big potential
loss and fear of gap or heavy drawdown prior to expiration.
I'm past the point of shutting down and walking away due to heavy debit.

Trying to find if there is a way for insurance now in this late stage.
To close to the money for kite; correct?
If so looking at either rolling down which still makes me nervous or
selling call spread to bring in some extra premium, or simply buying a lower
number of puts to at least help negate some of the potential.

Is it too late to protect? Is combination of rolling, selling call
spread, and purchasing puts a good "option". What would you recommend?
Any advice is appreciated.



Hi Tim,

Very sorry to hear of your problems. I'll tell you what I think and hope it helps.  First, it's never too late to protect. Keep in mind that anything that reduces risk is good.  So if you elect to try a combination of trades, that is ok,  As long as the resulting position is not too complicated to handle.

1) "I'm past the point of shutting down and walking away due to heavy debit."

I am not advising you to shut down.  But, you still have more to lose than gain – if the market tanks.  It's okay to decide to hold – I know how painful it is to exit here – but try to decide if you can afford to take the risk of holding.

2) It is late for the kite.  It loses effectiveness as expiration nears.  But you can do a more expensive kite.  Buy one 640 put and sell only 2 put spreads at a lower strike – perhaps 590/600 or 600/610 or even more 610/620s.  This costs cash, but wins in a huge downside move. Check the risk graph to see.

3) Many traders choose to collect extra premium by selling calls. I believe this is the worst possible choice.  If the market reverses, you can incur the same devastating loss on the upside. And for what?  You probably can't collect enough cash to do you much good on a market drop.

4) Rolling down means closing one spread and selling another May Put spread with lower strike prices.  But it also means NOT selling extra spreads.  It means paying a debit for some immediate comfort – but in these volatile conditions, that comfort can disappear immediately.  This does not feel right to me – especially if it makes you uncomfortable.

5) As a compromise you can cover 5 of each spread, or perhaps 10 of the 630/640 spreads.  Obviously, there is nothing magical about the quantity.  You may feel better doing 2 at a time on any rally.

6) You can roll this way:  Cover the 630/640 put spread and replace it with Jul iron condors.  I say Jul because that month allows you to be farther OTM than Jun and it gets you short extra vega.  If selling vega does not appeal to you right now, that's fine.  Do Junes instead. 

Yes, you sell calls, but this way it's a fresh position, is farther OTM, and depending on how you choose your strike prices, will not cost much cash.  By the way, that last part is a side comment.  I believe it's very wrong to choose your new position based on the total debit for the roll.  You must like that new IC – or else this is a very bad idea.  No sense opening a July position when it is already outside your comfort zone.

DO NOT trade extras just to bring in more

Obviously if you trade put spreads and not iron condors, then just roll the puts.  Don't force a trade you don't want in your portfolio.

7) Sure you can buy 600 or 610 puts, but those are no longer cheap.  Here's the main reason I dislike that idea:  Owning protection in the form of farther OTM options is fine.   They do a decent job.  But, if the plan is to hold them to a point near expiration, then it's no longer a good idea.  You can't sell them because they are still needed.  Thus, the most likely result is that they will expire worthless.  If you were planning to exit your put spread early, then these OTM options can work (because you get to sell them early).  But I think it's too late for that.

If you want insurance against a complete market collapse – that's another story.  Then owning any options will help.  But as to using them to protect this specific trade, (again – and not as black swan protection), there are better choices.

NOTE:  Buying Jun farther OTM puts works very nicely.  A down move explodes volatility and these can pay off big time.  Unfortunately the time to buy them was before the IV explosion.   But look to owning some extra Jun puts.  Choose your own strike.  600 is better than 580 etc, but even 560s may help.

8) It is not too late.  But anything you do is going to cost cash.  You can walk away and end the nightmare, or you can try to salvage the position.

The best trades are the ones that buy net puts.  That's black swan protection.  To minimize the cost, you can sell puts (this is buying put spreads) or put spreads (kite).

Have you considered buying the 640/600 (or 640/610) put spread?  Lots of cash, but good protection.

Tim, the bottom line is that anything may work.  It's just that we cannot know in advance.  If you exit, the agony ends.  If you work with this you may lose more, or have a very successful trade.  In either event, unless you close your eyes and come back in two weeks (I could never make that choice), some cash must be invested.  You have the rest of the day to work on this, consider alternatives, use risk graphs and devise a plan.

That plan should include a small gap opening (say 10 points) – both up or down.

Best of luck.  If you choose to follow up with what happens, I'd be interested.  But I also know that it's personal information that's best kept to yourself.

I wish you well.


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10 Responses to Nightmare on Put Street

  1. Jason 05/09/2010 at 12:23 PM #

    Hi Mark,
    If you look at the 640/630 put spreads in isolation, what do you think about buying 10 640/620 put spreads to convert the position into a short butterfly? I’ve been murdered by negative gamma blow ups before, so I try not to have any options (definitely no short options) left 2 weeks prior to expiry. I’ve been looking for other ways to adjust positions in margin-efficient ways, and this seems like it works as long as I unwind it a couple days before expiry.
    A separate question I have is when you make adjustments, is your focus more on relieving the anxiety any one position is causing you and choosing the adjustment that fits that goal best, or is your thought process more along the lines of “I’m not comfortable with this position, but I still think IV is high and I want to be short volatility”?

  2. Mark Wolfinger 05/09/2010 at 2:10 PM #

    In isolation means the 610/620 spread does not exist in the portflio. You are talking about being short 20 640/630P spreads.
    The 640/620 spread requires a substantially larger outlay of cash when compared with simply exiting the 640/630P spread. That’s a big negative.
    It does reduce margin, so if that’s important, it’s a positive.
    If you buy it 10 x 10; you become short 10 butterflys: 620/630/640P
    Is the market runs away from 630 in either direction, the fly moves to worthless and you recoup some cash. But you will have to pay something to buy it. It will not be free.
    What’s the current market for that butterfly? If you convert to that position, the value of that fly is what you are seeking to gain.
    How does that value compare with buying the 640/620 vs buying the 640/630? That difference is your investment to earn the value of the butterfly. Is that a good risk/reward for you? I did not run the numbers but I can see that it doesn’t work for me.
    Preferring to exit prior to expiration means you will suffer again if and when RUT is near 630. Are you willing to take that risk?
    Part II.
    Relieving anxiety comes first.
    Opening a new trade that’s short vega comes second.
    The good news about this scenario is that you accomplish both at the same time when rolling. This is one of those rare times when rolling a position makes sense.
    Exit the near-term, high gamma, uncomfortable trade, and open a more delta/gamma neutral position with extra negative vega.
    You are not obligated to play delta neutral. You are now long the market with a mis-behaving put spread. So, you can convert to a new iron condor that is also short delta (by selling farther OTM call spreads – just in case the unexpected happens).

  3. Tim 05/09/2010 at 4:08 PM #

    Thank you for your reply. This blog is one of a kind and very informative for us trying to learn as we go.
    A friend of mine who has done this trading for years told me the money is made in how one handles adjustments. This became very relevant to me in march for the first time. I’ve now gone from a confident offensive player to a timid and defensive minded one.
    Rookie question. When you say “buy a 640”, with holding 640 shorts right now are you saying basically buy back an open short?

  4. Mark Wolfinger 05/09/2010 at 4:43 PM #

    1) Agree. The strategy just lets you play the game. Risk management decides your success or failure.
    2) Yes. You can buy the 650P if you prefer, but covering an open short is just as good, and with the options so costly, you may prefer it.
    NOTE: I did not chose that strike because you were short it. I chose it as the HIGHEST strike in your current position.
    I would NOT buy the 620 put, even though you are also short that one.
    It’s ‘cleaner’ to buy the 650P, but sometimes it’s worthwhile to have a less ‘clean-looking’ position to trade efficiently.
    I like that ‘one-of-a kind.’ Tell people to come pay us a visit!

  5. Tim 05/10/2010 at 9:41 AM #

    The market Gods handed out a gift. Held fast with futures soaring. Now wondering best way to take advantage of this mega bounce. I have 10 590/580 and thinking about closing half to all of the 590 shorts that are way up and leaving the 580 longs as insurance but not sure if this is a good idea.
    Also trying to capture some Credit on the call side around 730 to 740 range but thinking this might be sticking out my neck too far for .50 credit.
    Really appreciate your feedback. I feel like school is in session with this market and today is preperation for the final.

  6. Mark Wolfinger 05/10/2010 at 11:06 AM #

    You don’t always have to do something. Some positions are ok as is.
    Yes, you got a gift. Just think about how you would feel if it had been a decline of 400 points.
    Your idea to cover half the 590 sucks big time. You would have a back spread at bad prices and need a miracle collapse to earn any money.
    If you want protection, now is the time to buy a small number of 600s or perhaps a June kite.
    Selling a June call spread @50 cents is insanity. I have no other words to describe it. It will NOT help your downside. What’s 50 cents on a market collapse? And the big problem is that you place yourself at risk in the event of a very unlikely continued rally. But today’s event was also unexpected, so who knows?
    Remember your friends advice: It’s how you handle the adjustments that matters.
    In short, I do not like either of today’s ideas.

  7. Tim 05/10/2010 at 1:03 PM #

    Thank you … I agree … I shut off the computer to remove myself from the temptation of “just doing something” as I was telling myself that sometimes the best trade is no trade.
    Thanks for all your feedback.

  8. Mark Wolfinger 05/10/2010 at 1:10 PM #

    Appreciate the dialog.

  9. Joe 05/10/2010 at 6:15 PM #

    Nice response Mark
    These type of events are great learning experiences for rookie traders, so long as the lesson is learnt and not quickly forgotten. I suggest that rookies that felt the heat when the fire came through should write down in a journal or some place they will frequent, just how they felt at that time. I’ve done this before and it has kept me from repeating past mistakes.

  10. Mark Wolfinger 05/10/2010 at 7:04 PM #

    Hi Joe,
    The Journal is a good idea. I endorse it.
    One aspect of human nature is that difficult situations are easily forgotten once they are behind us.
    The ability to remember the lesson and take appropriate action to avoid repetition is a trait of the successful trader.