Option repair strategy

[Hopeful]

I've heard about doing ratio back spreads on losing stock positions to bring down the BE point and was a wonderin' how to repair my terribly injured bull call spread on GG. I was very bullish on gold at the beginning of the month and entered into the spread will conviction so strong that I ignored my exit rules and ignored what the chart was telling me. So here I am bleeding profusely feeling sorry for myself, is there any way to repair this disaster:

29th Nov Bought 2 $30 Jan GG calls @ 2.55 = -$510
29th Nov Sold 2 $35 Jan GG calls @ 0.65 = +$130
Net Disaster at the present time -$380

Those $30 calls are now worth .30-.40 cents.

I could sell 2 ATM $27.50 calls for $1.05 x 2 = $210 but them if GG goes all the way up to $30 I will only have increased the pain. Oh dear, what to do

 

[ducati916]

I've heard about doing ratio back spreads on losing stock positions to bring down the BE point and was a wonderin' how to repair my terribly injured bull call spread on GG. I was very bullish on gold at the beginning of the month and entered into the spread will conviction so strong that I ignored my exit rules and ignored what the chart was telling me. So here I am bleeding profusely feeling sorry for myself, is there any way to repair this disaster:

29th Nov Bought 2 $30 Jan GG calls @ 2.55 = -$510
29th Nov Sold 2 $35 Jan GG calls @ 0.65 = +$130
Net Disaster at the present time -$380

Those $30 calls are now worth .30-.40 cents.

I could sell 2 ATM $27.50 calls for $1.05 x 2 = $210 but them if GG goes all the way up to $30 I will only have increased the pain. Oh dear, what to do

Assuming you are no longer bullish then;

Sell 20 January Expiry Calls @ $30 Strike @ $0.30
Buy 20 Jan Expiry Calls @ $32.50 @ $0.10
Net Credit = $0.20 = $400
Net +$20.00

Of course you have now assumed a further $2.50 - $0.20 in Risk
$2.30 = $4600.00

The Calls are correctly valued
ITM Probability = 18.5%
Probability to expire worthless = 81.5%
Probability price < $30 = 81.5%
Probability price between $30.00/$32.50 = 14.2%
Probability price > $32.50 = 4.3%

And having a risk management strategy for the trade should it go against you would be a pretty good idea as well.

jog on
d998

 

[happytrader]

I've heard about doing ratio back spreads on losing stock positions to bring down the BE point and was a wonderin' how to repair my terribly injured bull call spread on GG. I was very bullish on gold at the beginning of the month and entered into the spread will conviction so strong that I ignored my exit rules and ignored what the chart was telling me. So here I am bleeding profusely feeling sorry for myself, is there any way to repair this disaster:

29th Nov Bought 2 $30 Jan GG calls @ 2.55 = -$510
29th Nov Sold 2 $35 Jan GG calls @ 0.65 = +$130
Net Disaster at the present time -$380

Those $30 calls are now worth .30-.40 cents.

I could sell 2 ATM $27.50 calls for $1.05 x 2 = $210 but them if GG goes all the way up to $30 I will only have increased the pain. Oh dear, what to do

Hi Hopeful

Judging by that bought call going from $2.55 to 30 -40 cents it looks like you've been in two minds for sometime. No need to dig yourself in deeper and try to cope with another trade right now.

Refuse to be subjected to further uncertainty and get out.

Cheers
Happytrader

 

[sails]

Hi Hopeful,

Very difficult to repair after the horse has bolted and agree with HappyTrader that often the best thing is to get out.

However, if there isn't enough premium left to sell, it can be left there should the share price recover during the life of the option.

One adjustment I have sometimes used on a failed bull call is to roll the long leg up and out to the next month to create a calendar spread provided I feel the fall is just a temporary situation.

Usually, the more the SP falls, the greater the debit to make this adjustment, so it's best done sooner rather than later during a fall. The advantage is that the sold option may expire worthless and then gives more time for the SP to recover.

One thing to watch with this adjustment is increased IV levels affecting the further out months - so take care with that one. Also, if it ends up being too far OTM, it may not be worth the adjustment at all.

Hope this helps!

 

[wayneL]

I agree with Margaret.

It looks pretty much like you are close to maximum loss from my very quick mental calcs (very dangerous thing for me to do ) So yes the horse has bolted, it's too late. And agree with HT that any "adjustments" at this point and you could jump from the frying pan into the fire.

Consider this though: your risk/reward from this point forward is actually very good. Very little further risk and all upside and you still have 3 weeks for this trade to turn around. It could still come good.

Selling the spread now removes very little risk.