Getting Paid To Roll A Debit Spread

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Debit spread: Welcome back to the video recap that we do here each and every night on the membership side of our blog. We’re going to get to all the trades that we made on Wednesday, December 10th. It’s a pretty crazy market today, stocks were down, oil was down again, just seems like it keeps falling which is hurting some of our positions, no doubt. But I wanted to give you guys a heads up.

Those of you who are members, and I know that a lot of people are currently on the 7-day trial right now, just as a heads up over the next week or so, we’re going to be making some pretty significant changes to the membership side, and you’ll start to see things that’ll get changed and shifted and moved around. And the whole idea is to make things a lot easier to navigate, but also to take out some redundancies and things that people don't use.

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In essence, we’re going to be combining a couple of sections like the economic calendar and the expiration calendar into the download section. We’re going to be also adding some cool download as far as the checklist for trading like a mini trading plan as we get together a bigger trading plan to release next year. And then some other things, a checklist for different strategies, a checklist for liquidity, so a lot of fresh downloads and worksheets that can be useful for you guys based on the feedback that I received from talking to a lot of the premium members.

And then again, removing some of the redundancies like the help and support buttons, those are going to go away on the actual website because… And you might not see it right now in the video, but we have that “need help” tab that’s on every single page of the website, so there’s no need kind of a high-level strategy for the site. There’s no reason to have that there. It’s just wasted space.

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And my whole thing is I want to drill down and focus on just the most important things that get you from where you are now to where you want to be with your trading. What you’ll also find is that we’re going to go through some of the video tutorial sections and take out some of the video tutorials and start replacing them with some updated content.

And we always update the video tutorials; we probably add at least a couple of tutorials every single week, but now we’re going to be very strategic about how we go about that, and it’s going to have more of a course type layout which I think you guys will like. That's going to be one of the major, major updates, but it’s going to take a little time actually to do this.

We’re going to do it live on the site, we’re not going to clone the site and do it someplace else, so just bear with us with the “digital dust” here as we make changes. But I think everything you guys are going to like. And then obviously, we might have a price change coming up to reflect all of the new changes, so anybody who sticks with us now apparently will be grandfathered into the current pricing structure, everybody else will get the new pricing structure whenever that gets released.

As we go through here and talk about the trades that we made today scrolling down, we did have three adjustment trades, one closing trade, and one opening trade, so fairly balanced. We had a little bit more adjusting to do as we get closer to the end of December. Let’s first go over the opening trade that we had in XLE. XLE was excellent; it was an interesting trade because implied volatility was obviously high in XLE as oil continues to fall.

This is acting like a mini replacement to our current RIG credit spread that we have above the market. We had entered that credit spread in RIG, and we've made about $300 or $400 on that trade right now as a hedge which has been splendid, but it’s run its course, it’s made all of the money it can potentially make, and we tried to close it out today, just didn’t get any fills.

What we’re doing is replacing that with XLE for January and the 78/80 call spread for $62 in credit. Now again, this is a replacement trade, so it’s technically like a mini hedge, but it does stand alone as its individual trade which is why I sent it out as an opening trade, not as an adjustment or hedge.

What's cool about XLE is the volume that we saw today on those options. Before we get to the trade tab here, you can see what the chart looks like of XLE as soon as the platform here brings it up. You can see that XLE has apparently moved down as oil has moved down. And let me just move it to the IV look here. And as oil continues to go down, we had a nice spike in implied volatility here for XLE.

Now, almost the same thing happened back in early October. And after oil dropped a little bit, it regained some footing and rallied back up, and we did see a decline in IV after that point. That's really what we're looking for here with this trade as well. It acts as a hedge because we’re definitely long some oil stocks, we want oil to go higher, but if oil does continue to go lower, then we’re going to make money on this trade as well as the RIG trade which we already have banked profits on and we definitely like to see a drop in implied volatility too.

Now, if we go into the trade tab here, you know that it's really interesting because open interest and volume were extremely high for these two contracts. And this wasn’t anything that I setup as far as a scan, it just happened to catch your attention. And you can see that there’s another set of contracts over here that catch your attention as well as far as two different contracts in the puts and the calls that are active.

My personal belief is that this is a very, very large iron condor of some sort or defined risk trade because we have almost an equal number of contracts, two strikes apart on either side of the market with about 15,000 here, about 10,000 here. Each of these are about $2 wide on either side of the market. I feel like that’s probably some sort of wide iron condor.

People are assuming or maybe one or two large traders are assuming that oil stays risk defined in this range here and implied volatility goes down. To that liking, we decided to enter a very similar trade, but just on one side of the market because that’s what fits in our overall portfolio. We could've added the whole thing, but we wanted to add just that one side of the market because we needed to get a little bit more negative Deltas for oil.

One trade that we actually did end up closing out today is UNP. UNP was a calendar spread that we put on about two and a half weeks ago and basically closed it out as a scratch. Really, nothing to say about this trade other than it just closed out as a scratch because these calendar spreads sometimes work out, they sometimes don't work out, and they’re really just a means to stay active in the market as we wait for higher levels of implied volatility.

With UNP, the stock had made some movements and had a big move down today, but implied volatility started to tick up which helped us even though it moved outside of the range that we were expecting. Alright, the stock just doesn’t seem to want to load. But with UNP, it just didn’t really move anywhere and not really worthy of holding onto at least all the way through December expiration.

When we get down to talking about adjustments, the first two that we’re going to talk about tonight are two adjustments that go hand and hand together and that's PBR. We adjusted both of our short options in December and rolled them out to January. Use last night's video tutorial with XOP. It’s pretty much the exact same thing we did with PBR except for one slight variation and we’ll go over that here in a second.

We used a calendar for the put side to go ahead and close out December, so we bought back the December short puts at 15 strike and we sold the January 15 strikes for a $2 debit. It actually goes in as a sell order and then a negative number which equals a debit. It’s like two negatives equal a positive, same thing. And then actually logistically for the next one, because there was no 8.5 for January because we had sold the 8.5 calls in January, we actually rolled out to January and down to the 8s.

You can see that that actually went in as a diagonal order. Not to confuse yourself. Remember just to breakdown these orders into their individual pieces. We closed out of and bought back our December 8.5 calls, we rolled out to January, since there were no 8.5 calls available, we went down and closer to the market to the 8 calls and took in a credit of $.43.

Now, what’s really important about this trade is that we’ve continued to stay small and because we knew that we had other positions when we entered this position in PBR, so we've been able to now roll it out to contract month after contract month if we need to. And our new position in PVR looks like this. This is our inverted strangle. It actually goes well beyond this chart here. But you can see on this side of the chart; this is where our new position is. And PBR even after today's massive move lower is trading right about here, about 7.75.

This position is relatively good because it still moved out our breakeven point much further to the bottom side by taking in that additional credit and going out in time. And that’s ideally what we wanted to do, are we wanted to try to re-center the trade as much as we possibly could and come a little bit closer to the market, take in more credit. That's what we’ve done and rolled this trade out to the next contract month, very similar to what we did with XOP.

Now, the last trade that we’re going to go over tonight is the roll that we had of our DIA debit put spread, the 178/176. Now, I know there’s some confusion with the order number. We only had one contract in this order; we did not have 13. I know that when the original alert went out, somehow it had 13 on there and we had talked about it that night in the video that it was an error in the alert system. We didn’t have 13 contracts.

But if you still have 13 contracts, it’s a good time to scale back. And as always, we even mentioned it time and time again in the “getting started” video on the membership side that you need to make sure that regardless of whatever trades we send out that it fits your portfolio, so if we send out an alert for 100 contracts, that doesn't mean that you should be trading 100 contracts. You should scale down or scale up to fit your portfolio appropriately.

The whole idea with DIA is that it's close today and we’re getting closer to the end of December, so now we have this decision whether or not to roll or let the trade go all the way through December. And we’ll see if DIA brings itself up here on the chart. My opinion is that when we’re this close to being in the money or not for expiration, we need first to decide do we still like the position. That’s the first thing, is do we still want to be short DIA or short the Dow. And in my case, I do. I think that the Dow hasn’t rolled over much at all and we’re back to square one from where we entered the trade.

I still like being short the Dow and that's the most important thing when deciding to roll. Now that I know that I like the Dow, I want to keep the same strikes as possible because that minimizes the potential to move up strikes up or down and reduce risk or loss or potential gain. I wanted to keep the strikes the same and that’s exactly what we did on this roll. We went from December out to January and kept the same strikes.

Now, what’s really, really interesting about this trade and pretty awesome actually is that we were able to roll this debit spread for a credit which is virtually unheard of sometimes, to be able to roll a debit spread for a credit to get paid money, meaning we're going to reduce our risk to go out to the next contract month. It's almost like a mini anomaly in the market that we’re actually getting paid money to reduce our risk and we’re getting more time to be right in the trade.

It just seemed like a win-win, you had to make this type of trade. I can tell you right now that that’s not always the case. In fact, this rarely happens that you get paid a credit to roll out a debit spread. Usually, you want to get paid another credit to roll out some sort of short option strategy like we had here in PBR. But rarely do we get paid a credit to roll out our December spread to January.

You can see now here with DIA that this is our new position, this orange line here on the chart, this is our new debit spread for January expiration. And with DIA closing lower today down here, it gives us an opportunity to make a little bit more money and keep the trade alive for a longer time period to see what the market can do, if it can really, really selloff. Let’s see if the chart…

Nope, the charts didn’t pull up, so unfortunately we can’t look at that tonight. But as always, I hope you guys enjoy these videos. This was a pretty active day as far as opening, closings and adjusting. If you have any questions, please add them right below this video inside the membership area. I’ll get back to all of those comments 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. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. 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 three children.