Tag Archives | expiration nightmare

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.


Read full story ยท Comments are closed