Q & A. Held My Credit Spread Too Long. What Do I Do Now?


I'm ITM on some RUT put
credit spreads I sold for NOV. (A mismanagement mistake, from which I have

Vital question.  Have you learned?  If, after deciding not to make any adjustment to your position, if RUT had rallied, would you have learned the same lesson, or would you feel vindicated that your decision to hold the trade was an intelligent thing to do?  Sometimes winning is not good for the trader.  Read this.

I was wondering if there is some technique I could use such as rolling, or iron
condors etc. that would allow me to buy some more time on these trades. Perhaps
closing one leg and…???

There is a lot in this short paragraph.

1) Rolling for a cash credit is a viable
idea, but I don’t like it.  Rolling a
position means closing the original spread and substituting a new position with
strike prices that are further out of the money, and often using a more distant
expiration month.  Most investors try to collect
a cash credit when rolling because that produces the false idea that there is
still an opportunity to earn a profit from the original trade.


As of today, this trade has lost
money.  Face that fact.  True, if you continue to hold you will either lose more money or reduce that loss.  And yes, you may even wind up with a profit.  Your decision
is:  Do you hold the position or close
it, and find another trade? 

Question: Which position do you want in your portfolio now?  The current position, with options that are ITM, or a fresh position that is more neutral and which had a good chance to earn a profit today, tomorrow and over the near-term?  If you want to own a very bullish position, then keep what you have.  If you don't want to wager on market direction, then abandon this trade and find something that you like better.


To me, rolling is two
  First, do you want to hold or close the current trade.  If you hold, no further decision is necessary.  But you must revisit this decision often.  It's poor risk management to just close your eyes to a bad situation.

Second, if you decide to close, then you must decide if this is an appropriate time for a new trade.  If it is, find one that's suitable and open a new position.  But don't force it.  Don't feel you MUST make back that lost money NOW.  Your goal is to make money from today forward.  Your goal is not to recover, but to make progress.  To do that you want to own a position that gives you the best chance to make money today and tomorrow.  Surely that uncomfortable current position is not your best choice.  Surely you can find something better – with a better chance of success and with less riskBut, that's an individual decision.  It's not 'wrong' to hold, if that's what you want to do.  But if you want to hold, why do you say you made a mismanagement mistake?

If you do close, do not look back.  Do not follow to see how you would have done.  You have enough to do to manage your current portfolio.  Your objective is to make the best possible decision at the time a decision must be made.  Not every decision will make money, but if you make good decisions, you will be well ahead of the game over the long term.

NOTE:  Selling credit spreads and buying iron condors is a viable, long-term method to make money.  But you are going to have many (many, many) losing trades.  Don't fight it.  Your job, as risk manager is to be certain those losses are not too large.  Not so easy when the market is this volatile. 

2) Yes, an iron condor reduces risk by allowing you to collect additional cash.  That means your maximum loss is reduced.  But in return, you accept a possible loss if the market moves in either direction.  This is a comfort zone decision for you to make.

3) Closing one leg? Do you really want to change this spread into a naked long or a naked short position?  Are you that desperate to recover your loss that you want to gamble?  That's your decision, but If you want to gamble, why bother with spreads in the first place?

4) Buy more time?  For what?  This position has moved against you.  You failed to adjust. The risk of further loss is staring you in the face.  If this is still within your comfort zone and you don't believe you are gambling, then so be it.  My advice is to recognize a bad situation and move on.

5) Basically you have a loss and want to discover the best approach.  Some traders are never willing to accept a loss and are always rolling, fixing, or playing with bad positions in an everlasting effort to get even.  And if they do succeed, they feel great – not realizing how much more money they could have earned by managing a portfolio of good positions.  Here's an article I wrote some time ago.  

My only thought at the moment is to wait it out and hope that RUT rallies and moves my puts OTM.

No. No. No.  Hope is simply not a viable strategy.  It's your money and your position, but I'm sure you will feel better with a new Nov position that has a chance to earn a profit from here.  I have no idea if we have reached the bottom or if the worst is yet to come.  Do you?  If yes, then go out and make your fortune.  Me? I must do the best I can and that means safety first.

Best of luck to you.





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