Lesson Overview

BIDU Put Calendar Spread Adjustment

Calendar spreads can sometimes be a little difficult to adjust. Our recent position in BIDU saw the stock move higher right after entry (away from our put strike target). As a result, we rolled up our short position for our 1st adjustment to this BIDU put calendar spread. This gave us a higher net credit to offset any potential loss that might occur if BIDU does continue to move higher from here.

Show Video Transcript +

In tonight’s video, I want to go over just our one lonely adjustment trade that we had today to our put calendar spread in BIDU. We didn’t make an adjustment today because BIDU has continued to run just a little bit higher.

Now that we’re getting closer to expiration, we’re going to start making some slow adjustments to this calendar spread to hopefully do two things. One, reduce risk obviously which is number one and the most important thing with making these adjustments.

But two, also leave an opportunity to make back some money if BIDU does happen to fall from here which it very well could. I want to go over to that trade, but logistically, here's exactly how we went through it.

We rolled up our 195 put for April, and we rolled that contract up higher because basically, it was worth nothing. As BIDU has rallied higher, our short put at 195 that we had originally entered into practically has no premium left in it.

It's not worth holding onto, so we rolled that closer to the 202.5 strikes. Now, what that did is that allowed us to take in a net credit of $65. Now, this credit that we took in of $65 helps offset the cost or the original cost of the trade which helps reduce our risk should BIDU continue to move higher.

The name of the game here with adjustments is we have to reduce our risk first before we do anything else. Now, here’s a look at what the original position looked like. This was our put calendar spread right at 195.

And you can see that we were a little bit bullish on BIDU. We thought that the stock might head lower. And it still might head lower. But right now, the stock is trading right about here.

At this moment, the stock has moved higher, and our profit window is much, much lower than where the market is at the current time. What we’re doing here is we’re taking the 195 strike which is somewhere in between here and we're rolling that closer to where the market is.

Now, we’re not touching our long strike. Our long put that we had originally bought for May which is the back month, we’re keeping that there because it still has some value left in it. We don’t need to touch that. We’re rolling that put strike from April (the one that we’re short) closer to the market and taking in a wider credit.

Now, this is doing a couple of things. It's going to add a little bit more risk to this side of the trade. We’re going to add a little bit more risk. It’s going to pull this profit and loss line in this way.

And on the other side though, it's going to push this maximum risk to this side up, meaning it’s going to push this profit and loss line up, and that’s going to reduce our risk should BIDU continue to move higher from here, so we get this shift and change in the profit and loss diagram.

Let me just activate that adjustment that we made. And this is what it would look like at this point. You can see it no longer looks like a normal calendar, it’s more like a diagonal spread, and you can see it flattens out on this top.

Instead of doing something like this where it was a lot wider and steeper, now it flattens out on the top, and we’ve reduced the risk for sure if BIDU does continue to move higher.

Now, what I do like about this adjustment is if BIDU does happen to move lower, is that we lose less and less money and we do turn a little bit of a profit if it does head into 202 1/2 as far as a strike price.

We’re leaving a little bit of downside room here, but at the same time, slowly starting to make this adjustment to the overall position. When we look at where our original position was and where we have made an adjustment, you can see that these two positions are not too far apart at all.

We’re making very small, slow adjustments here. The 195s which we originally sold for $285 are now worth about $59. You can see that they have lost the vast majority of their potential value. They’re not serving us a lot of premium to sit here and be worth.

And what we did is we rolled up from the 195s to the 202 1/2. And you can see those 202 1/2s are worth a lot more money right now. We took in that net credit or the difference between those two.

But the 202 still have about a 20% chance of expiring in the money or about an 80% chance of expiring out of the money, so it's still very high likelihood that it doesn't get to 202. But at this point, we’re mainly focused on reducing the risk for this trade, and we can do this some times.

And, if you go back inside the video tutorial section in the case studies, you'll see in optionalpha.com that we have done this same type of strategy and rolled up numerous times with another security in our case studies and that’s CMG which is Chipotle.

Chipotle a couple of months ago moved really far against us and we were able to do this same type of adjustment, not one, not two, but three times on Chipotle and just kept moving up our strike, taking in more credit and more credit and more credit to the point the we reduced the loss by more than 70%.

That's all we need to be doing as traders, is managing the trades that go well and then taking these trades that go not so well where the stock moves against us, we have no control over that, and being diligent and smart enough to make adjustments that reduce risk along the way.

This was a little bit more in depth video obviously on BIDU because it was the only trade that we made today. But as always, if you guys have any comments or questions, please add them right below. And until next time, happy trading!

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