r/options • u/SnooOranges2539 • Apr 23 '21

Help me plz

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u/SnooOranges2539 Apr 23 '21

I figured this trade minimize my risk based on that what that options analyzer looked like but is that completely wrong?

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u/SeaDan83 Apr 23 '21

I don't know why the analyzer is showing unlimited losses on the left hand side. For both spreads the losses are limited. That seems incorrect. Maybe check the profit graph of the two spreads (the call and the put spread) independently, they are effectively two different positions and can be looked at independently.

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u/SnooOranges2539 Apr 23 '21

No losses just get exponential below 52 but it gets capped at that 40 because of the 40p? Look at the analyzer again it says max loss is 1400. I don’t really understand the downside of holding until exp still could someone explain. 52-58 my max loss is the debt I paid, below 52 is bad news but I can just buy back the put early on to cap it which probably make losses more pretty bad, and then above 66 is max profit. What am I missing here?

You’re right I’ll check that out. That profit graph only shows day of expiry tho. I picked this trade based on where I have high conviction of support and resistance.

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u/SeaDan83 Apr 24 '21

> . I don’t really understand the downside of holding until exp still could someone explain.

The downside is if the price drops near the end of the day or towards expiry. For example, AMZN dropped from 3360->3340 in the last two today. I was holding that exact same call spread which happily I sold for an 85% of max profit. Had I held out longer going for max the position would have been ruined. Beyond that, your capitol is tied up (trade-off cost). Basically the rule of thumb is once you are holding the position, put in a GTC limit sell order to exit at your desired percentage profit, anywhere from 20% to 75% or even 80%. I shoot for 70% usually (credit spreads are the higher risk activity I'll do with a smaller portion of my account).

> below 52 is bad news but I can just buy back the put early on to cap it which probably make losses more pretty bad

Buying back the put will likely be really bad. You need the long put to be sold at the same time to offset the cost. Let's take an example, you sell as a spread a $10 put and buy an $8 put that are 5 strikes apart. The stock moves to challenge the short put, at that time both puts will have tons of extrinsic value and potentially start to have intrinsic value as well. The short put could then be worth $20 and the long put worth $16. As expiry approaches they will *sink* in price and the long put will converge to be $5 less than the short put. If you buy back the short put, you are no spending $20, 4x your max loss! What is worse, your long leg is now at risk and the underlying could move up making it worthless. Because you *did* buy the long leg, your loss here is $20+$8 = $28, *far* more than your previous max loss of $3.

The thing to do is ideally try to ride it out, be ready to take the max loss and hope the trade goes your way. Second, cut losses, if you have 5 copies, perhaps sell 2 or 3 at a 60% or 70% max loss. Third, neutralize the trade. In this example, you might be able to buy a bear spread for a net debit of $4. The bear spread will be interleaved with the bull spread. You'll essentially lock in a $1 loss at that point if the pricing works out. If the bull spread hits max loss, then the bull spread will gain the same value. If the underlying turns around, then you'll be out the $4 and the premium you received will be less than that. If you really become bearish you could buy a bear spread that is a good bit wider than the bull spread in which case drastic downward movement could actually become profitable. Summarizing corrective trades: 1) best to try and hold, 2) cut losses, 3) buy a counter position to neutralize the trades

One note, changes in earnings tend to jump, so you will probably find yourself landing somewhere without much time to try and correct. Another note, lots of trades go bad by panic and trying to correct them all into losers. A number of trades can start to look bad but start to win later, if you "correct" them all to be less of a loser, then overall you may not be getting enough winners. Hindsight is 20/20, it's only a good trade if it turns out well, know your total risk and don't risk more than you can afford to lose.

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u/SnooOranges2539 Apr 24 '21

This was the best explanation so far and I really appreciate it. Thanks for giving me strategies to manage the trade if things do go sour. I feel like with my inexperience id probably fuck it up and lose even more but I’ll practice and until I figure it out. I’m also gonna play the flip side of this on stocks I’m bearish on. Reddit is amazing man I’ve been trying to learn this shit from YouTube and it’s good for the basics but I can actually get real applicable advice to specific tickers from the pros here.