Closing Out Some Losing Trades Before Expiration


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Options expire: Tonight, we’re going to go over all the trades that we made on Wednesday, November 12th. I got my days mixed up with the holiday in there. We had a pretty active day just generally as we get towards the end of the month and expiration coming up next Thursday, so we’re only about a couple of days away, 8 or 9 days away now. You should be starting to decide whether you want to close out positions or roll them to next month.

And we definitely decided to start closing out positions, stuff that was far out of the money or pretty far in the money, whatever the case is, just really I don’t think has a shot in the next couple of days, and those two would be XRT and HPQ which we’ll go over here in a little bit. But this is now the time of the month where we start closing out and have some of the losing trades start to roll up on the trade alerts. But that’s okay; it’s part of the game and that's why we show it to you guys because we’re going to show you everything, good, bad or different.

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The first one I want to go over is our adjustment of Chipotle which I think is a fascinating trade. It’s our second change that we’ve made in Chipotle since we entered our original calendar spread in Chipotle. And you can see that today, what we did is roll up our short put side for November, up higher from 610 to 640. We did this via a vertical credit spread where we sold the 640 and bought back our 610 that we were already short.

We took in an additional credit of $105 up by rolling this credit higher and have effectively neutralized the potential risk that Chipotle has if it does continue to move higher from here. But I think what’s really interesting about this trade is the fact that we’ve cut our loss almost in half on this trade which some of you are like, “Why is that interesting for me, Kirk?”

And the reason it’s interesting is that if you can do this on almost every trade you have… And we can’t do it on every trade, but if you can do it on half of the trades that you’ve lost money on or a quarter of the trades that you’ve lost money on, that's where you start to become a little bit better at managing positions, and you start to win back some of that money.

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Here’s the history of our trade into Chipotle. And this I thought might help tonight. Initially on 10/21, we entered a calendar spread. We’re assuming that Chipotle would go down and settle around 580. Well, it’s been opposite. The stock has gone almost $100 higher from that point, and that's just how things happen, it moves completely against us. We paid a 470 debit for that original trade. That’s our max loss that we could have on this trade.

A little bit of difference in pricing because of the December to November options. But as Chipotle rallied higher, we then rolled up our 580 puts to 610 and took in an additional credit of 159. And then again today, we rolled up our 610 puts which were only worth about $30 now, banked that profit on those 610 puts. We originally traded these for 223, now they're only worth $.36, so we’ve made all the money we could go on those. Let’s go ahead and roll this thing again up and take in a bigger credit.

At this point, we’ve now rolled this thing up again to 640, and that's given us an additional credit of 105. And when you take all of these things into consideration, we’re sitting at about a $200 debit on this Chipotle trade now, so that means that that’s the cost that we’re in. And we’ve neutralized the impact that Chipotle has; we just want it to stay higher at this point, we don't want it to go down.

When we look at the analyze tab, this is what our new position sounds like. What originally was a butterfly… And let me just move this chart over, so you guys could see it. Our original position was a calendar right here centered at 580. What we’ve done is we’ve now morphed this into a trade that looks like this. This is our new position over here and basically what we’ve done is we’ve shifted the calendar over, and we’ve pulled this side down, and by pulling this side down, that pushes this side of the calendar up.

You’ll notice that this side of the calendar starts to go this way and that’s just by rolling this put up to 610 and now up to 640. That’s exactly how we made this adjustment in this trade. And I think it’s a cool case study because you can take a calendar and trade that goes completely against you and cut your losses in half. And you can’t control the markets. The market goes against you; you could sit there on your hands and take a significant fat loss, or you could try to do something about it.

And in this instance, we had an opportunity to start to do something about it, and that’s what we sought to do. We continuously managed the position, we rolled it, rolled it again, and now we’re sitting at potentially half of the loser that we could've had which is a very decent trade. I like the trade. I like how it’s setting up. We’ll see how the last couple of days plan out.

But we’ll probably end up trying to close this thing out here in the next couple of days. That's a look at our Chipotle trade. For LinkedIn, just briefly, we covered and bought back our short call spread in LinkedIn, bought that back. This is a trade that we had made after LinkedIn had earnings. We had the butterfly mainly around 220, and we decided to buyback that call spread that’s deep in the money now and we wanted to buy that back well ahead of max profit.

We saved a little bit of money by doing that. Now what we want to do is let our put spread start to expire worthless hopefully, and that will narrow the gap and make whatever is left in that LinkedIn position that we rolled from the earnings trade.

To talk about new trades today, we did have one brand new trade today in Yahoo. I like this trade. I did go a couple of more contracts just because of the small debit that it cost to get in those trades. It’s only a $1 wide, but it’s a debit put spread. And actually, we haven’t even done a debit put spread in a couple of months because implied volatility has been so high, we haven’t found a need to do it, there have been better trading opportunities.

But in this case, Yahoo has had a huge run-up. And since then, I’m just playing the odds that at some point we’re going to have a move back down in Yahoo and we want to take advantage of that, so today, we went ahead and bought the 50/49 debit put spread. That puts our breakeven right about 49.5 on this trade in Yahoo. And basically, we want Yahoo to go lower like we said.

The reason that we decided to do the debit spread is that implied volatility is so low already, so you can see that IV rank is in the 20th percentile, so a very, very low implied volatility. But look at this stock chart. It’s gone parabolic. And at this point, you just have to ask yourself. Does Yahoo have a good chance of continuing up at this pace? I don’t know, maybe.

And for me, I’d say no. I’d say no, it doesn’t. I’d say at some point; we’re going to get a move back down into a more normal range. People are going to start to take profits, whatever the case is. With Yahoo, we decided, “Let’s go ahead and put our line in the sand right about here, 49.5.” And anytime between now and December expiration, if Yahoo trades below 49.5, we’ll have an opportunity to see a winning trade and take that trade off.

We’ll be pretty quick about taking that trade off in Yahoo. That's ideally what we want to see, is just a quick little win in Yahoo, quick directional play, and it gives us some more short Delta in our portfolio.

Alright, the closing trades that we had today, the first one we had is just our VIX trade, the final round of our VIX trade. We have done well trading the VIX. It’s always actually a relatively easy trade with the VIX. When implied volatility pops higher, we sell a credit call spread against the VIX anticipating that volatility is going to drop which it always does. And we’re just rounding out our position in there, closing out our 18/20 call spread for a $.10 debit, so we have a 105 profit in that one.

For XRT and HPQ, these are both credit call spreads that we traded and both of these stocks have gone well beyond that price point. Both of these trades were about 70% to 80% probability of success trades when we place them. But now, we’re looking at the one or two times during the year where the stock market, in particular, XRT and HPQ have gone well beyond that 70% level and have trumped us and kicked us into almost a full loser on each of these.

We did decide to go ahead and buy these back today, close it out. With XRT, we bought it back at $.98 which is just about $.2 less than a full loser, but you’re going to have to buy this back because it is in the money right now at 87 and 88. If we go to the chart here of XRT… Let me just go to the chart thereof XRT. And you can see that our strikes are down here at 87 and 88, not likely to get hit anytime soon unless the market completely flips around.

But with today's move higher in XRT, there’s just really no chance I think for this thing to come back around, so we’re going to go ahead and buy it back early, save the time that we have, whatever's left in it. But you can see this is a huge parabolic move in the stock, not to say that it can’t happen and continue, but it's gone completely against us, and that’s part of the trading.

We have these one-off opportunities where sometimes things don't go your way, and you just have to deal with it. Good thing we traded small. It’s a relatively small loser that we can deal with. Same thing with HPQ, we had sold the 34/36 call and bought it back for a 178 debit. The max that that debit can trade to is about $2, so we did buy it back for just a couple of cents under max loss which is nice to save a little bit of money here.

And with HPQ, you'll see that the stock has gone much higher than our strikes down here. Our mid-price was right around 35, so a minuscule chance this thing is going to turn all the way back around. And it's just had a huge, huge move higher which is outside of that one standard deviation range that we were looking for, but that's part of the trading, that's what happens.

Alright, I think that’s pretty much it. That wraps it up. As we get closer to expiration, make sure that you’re just taking a hard look at your position, seeing if you can roll them, seeing if you can close them out. Sometimes it’s hard to close out trades as we get towards expiration, but this is the name of the game.

We got to make lots and lots of high probability trades, and sometimes we’re going to lose on them when the market makes a move outside of one standard deviation. You just got to make sure that your position sizes are small in the beginning, so that when you have this happen, it doesn't blow up your account.

And that’s the key takeaway from tonight. As always, if you guys have any comments or questions, please add them right below in the membership section. I’ll get back to all of those tonight or tomorrow before the open. And 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.