Adjusting Options Trades That Go Bad

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Option trades: In tonight's video, we're going to go over all the trades that we made on Tuesday, February 17th. We've got a short expiration week with the holiday yesterday. Hopefully, you guys enjoyed the lovely long weekend, but that does mean that we have a lot of adjusting and closing to do this week this positions that are marginally on edge. We're going to go through a lot of those trades here tonight.

We def had a lot more adjustment trades and hedge trades today, which is just par for the course here as you get towards the last week of expiration. You got to decide whether you should keep a position, whether you should roll it out to next month or just close it out. We're going to talk about that a lot here tonight on the video, and that should help a lot with the questions.

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I want to start off tonight by talking about our closing trade in Amazon. As we discussed with premium members on the strategy call on Sunday night, we did decide to go ahead and buy back our deep, deep in the money call spread here for Amazon. We had made this trade and rolled this trade from a weekly trade when we are trading Amazon around earnings.

Amazon made a huge move higher after earnings and then continued to move higher after that. We had made a trade from earnings, that weekly trade, and rolled it out to the monthly contracts in February, just giving ourselves a shot in the dark that Amazon might come back down but also reducing our risk in the trade by rolling it out to the next contract month. I'll go through exactly the trades that we made live on my platform here in a second.

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We did decide to close out of just the call spread side, a full loss on this side. That's the 5$ debit that we paid, and again that's with the strike. We did close out the call side at a full 5$ loss. We're going to let the put side expire. Worthless. After all the adjustments and rolling that we did, we ended up taking a 345 loss, which is still a pretty decent loss. It's not overshadowed, by any means, by all of the profits that we've had on earnings trades.

We have reduced this loss down from originally what would have been 395, so that's not a huge reduction, but to me I think this is again one of the keys in trading is being able to take a trade that's going to be a $395 loser and cut that down to something smaller than that, whatever it is. Whether it's 345 or 350, 300. Whatever it is, but reducing our loss and being able to mitigate some of that risk when a trade goes completely wrong, and there's nothing we can do about that.

You guys know obviously that I'm 100% open to all the trades that we do so I'll show you here everything that we have; good, bad or indifferent. When I go into my platform, I've brought up all of the Amazon trades that we've made for about the last 60 days. Hopefully, you can see this on this chart. What you want to focus on are just the filled orders that we have over here.

These are trades that we had back in January early, but what we want to focus on really are just these trades right here, because this is basically that Amazon group that we have where we had that Amazon trade and these were the weekly. These Jan fives, those were the weekly contracts that we had, and we ended up rolling everything out to February.

What happened was we entered the original iron condor tried and traded Amazon route rings. We took in $105 credit. That didn't work out. Amazon made a hue move higher so in this order right here, which is this block, we rolled our contracts in January on the call side from the same strikes in the weeks to the same strikes in the February contracts.

In this side of the trade, we did pay a 105 debit so you can think of it as the fact that we canceled out our original credit of 105 because we just sold it back to the market for the same price and took no profit, no loss. Then what we also did has we added a put side to the trade. This is the side that will expire profitably, this 340, 335. That side of the trade was a 155 credit.

You can see that we were able to increase our credit by about 40 cents on this trade, going from 155 ... I'm sorry 50 cents, going from 155 from the original 105. Now when we close out this call side of the trade today for $5 debit, that's where we get the net total of 345 as a total loss. You can exactly see all the trades that were made right here in my live account.

Now again with Amazon, it's just critical to note that the stock made a huge move after earnings. There's nothing we can do about this; there's nothing you can do about this. All we can do as traders is try to mitigate some of our risks. We didn't think that Amazon was going to make that big of a move. It did make that big of a move, and it continued to move higher throughout the course of the month.

At that point by rolling out the contracts to the monthly all we were doing was giving ourselves a shot that at some point Amazon might have come back down into our range. It didn't, and that's okay, but in the process, we also took in credit, which reduced our overall loss on the trade. Had we just kept the trade and closed it out on the weekly, we would have been left with that 395 loss.

I think rolling out to the next contract month, even though it took a little bit of maneuvering of the position and it's def a little bit harder to understand the concept of rolling that out, being able to do that helped us reduce our overall loss. If I can do this on every trade that I have a losing trade on, that's right for me. If I can reduce the potential loss on a trade, that goes completely against me; I'm okay with that. I'm okay taking that type of trade and mitigating the risk.

Hopefully, that was a good example of what we did with Amazon. As far as the other trades we did, let's go over the opening trade first in GoPro. I really, really like this trade in GoPro. We did the March 48-50 call spread. That's a two dollar wide call spread, and we paid almost mid price, which is usually what we like to pay for a debit call spread. We're playing this directionally bullish here on GoPro, the 48-50 call spread.

The reason I like this trade is that of implied volatility somewhat low in GoPro right now. You can see, it's now about the 15th percentile, so it's incredibly small. Had a nice move up in the stock today. The stock was up about 12%, so we're just assuming that maybe the stock continues to move higher between now and expiration in March.

What's great about this trade is if I go in here to the actual trade screen here ... It's already up about five bucks, which is pretty nice. What's great about this trade is that again, our strikes are 48 and 50, but our net price was about 95 cents, so that puts our break-even price at about $49. Now when this stock was trading initially today, it was trading at about $50, so we're taking a trade where we had a break-even price that was almost a dollar below where the market was trading.

Since then GoPro has continued higher. Now they're 92 cents, so that's helped out our position. Now we've got a good position on our hands where we are risking every dollar to make a dollar, and we can double our investment, and we've got almost $2 of margin or error. The stock can go down, and we can still have the potential to make money. So really like this trade in GoPro, but even though I like it, we're still doing a subtle portfolio size.

All right so let's talk about adjustments. We did make one adjustment to XRT. We sold a naked 98 put, took in a $59 credit. The whole idea here with XRT selling this naked put was to hedge a current credit spread that we had so we had a credit spread about the market in XRT. Sold the 98 put, which was right on the money for 59 cent credit. That credit is going to help us reduce our overall risk in XRT.

Here's what the position looked like in XRT before we made the adjustment so here's our credit spread in XRT. You can see now that we're at expiration with the stock trading right here at this dotted red line, right down the middle of the screen here, we're looking at a loss of about $150 if we did nothing. The whole idea here is that we tried to mitigate some of this risk and try to cut that loss someway somehow.

What we ended up doing, it's again selling that 98 put. The 98 put was trading right about at the money for 59 cents so that 59 cent credit that we took in helps reduce our loss on this trade, as long as XRT stays up here to around a hundred dollars. We've cut our potential loss by a third. Again, this is the name of the game with trading, is that when you make these adjustments, you're trying to mitigate risk first. That's your first and only priority.

Now at this point, we look like we could have just a losing trade altogether, but if in fact, XRT does move lower, there is a range right around 97 here, where we actually could make a little bit of money or at least have even a smaller loss than we have right now. We are not assuming that happens; we're assuming that XRT stays as high as it is or even goes higher because that's what it's been doing for the duration of the month.

If we can cut our loss by another $60, that's exactly what we're going to do. This is our resulting position. It is naked on the put side, and that's a little bit tight on margin, so it's going to carry a little bit margin, but it's only three days, so we're not too worried about it. We've got the room in our portfolio to do that.

Other trades that we've closed out of today. We did buy back two of our in the money spread in both TLT and GLD. The whole idea with these is that when we near expiration, both of these put credit spreads, which were originally part of iron condors, are now deep in the money. We don't think that TLT will get back above 130 and we def don't think GLD will get back above 119.

As a result, we wanted to buy these back at less than max loss. So max loss would be the difference in the strike prices, which is $2 in both cases. The 130 to the 128, and the 119 to the 117. If we waited til expiration, we would have had to buy these back at $2 instead of 159 and 155. It saves us a little bit of money at expiration.

The resulting position for both of these and this is why I love the analyze tab. Resulting position for both of these for February then had the stock sitting square in the middle of our potential profit loss diagram. With TLT you can see this is our remaining February position, and there's probably no chance that it goes outside of this ranger here so we do have a little bit more room. Everything else for February should expire worthlessly.

For GLD we're still a little bit tested on one side of the trade, but again, I still think that we should see a nice expiration right inside this range. You know, this is our resulting iron condor after getting rid of that one leg that we had. We def would like to see GLD kind of bounce back a little bit, but as long as it stays in here, doesn't go down below to 114, we actually should end up making between now and Friday expiration, about another $70 on this trade in profit.

If everything expired worthless, from what we have, profit and loss now, just the decay in options for last three days, we should make another $70 on this resulting trade. We'll total everything up once we get to expiration and move everything into the closing column for total profit and loss. The last trade that we made was another roll up of our vertical in MCD, which was an original earnings trade.

We talked about this one as well on the strategy call with members, so premium members know exactly what we're doing here because we talked about it. We rolled up our 94 short puts to 95, took in a little bit more in credit and again that just helped reduce our overall loss as McDonald's continues to move higher. The reason that we decided to roll up that position, obviously take in that credit, but the 94 puts for ...

Let me just actually go here to our Option Alpha setting. The 94 puts that we had weren't that ... Didn't have that much premium at the time. I think they were worth maybe 15 cents, 10 cents, something like that, so rolling them up made sense because we close out those 94s at a profit. As a result, McDonald's is coming back down inside the range, but we're basically left with a very, very wide credit spread in McDonald's. We don't have any more risk here.

I don't see McDonald's going back down below 90, which is where we started to increase risk between now and Friday unless something crazy happens. At the point we beys have capped our loss, reduced it as much as possible and again, once we get to Friday expiration and we have everything fall off, then we'll total everything up and put them here in the closing columns so you guys can see what it ended up being after all the adjustments.

Safe to say, though, I think we did an excellent job. I think with McDonald's we've adjusted it twice, reduced our potential loss. I believe that we've cut our loss basically in half in McDonald's, from what we could have had if we had done nothing at all. Again, that's to me a splendid, a good trade and I'll make those trades all day long.

As always, I hope you guys enjoy these videos. If you have comments or questions please add them right below. If you're watching this video somewhere else online or on YouTube, you just have to understand that you're getting this video about 15 to 20 days after it's sent out to just our members so none of the information that we go over here is really actionable unless you sign up for our membership at optionalpha.com. Until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.