Credit Spread screwups $TLSA

 

Apr 24

Just wanted to share some thoughts about some recent screwups on credit spreads ive had on $TSLA

a quick recap, i generally follow the mechanics of the crew over at Tastytrade, specifically one of their guidelines is to take profits early. thru their studies somewhere between 25% - 50% of max profit. essentially you have made the easy meat of the trade now in order to get the remainder of the potential profit you have disproportionate amount of risk, ie the stock could reverse and turn your trade into a loss.

i know all that but here is the thinking i had that screwed it up... example using TSLA at 1000 stock price and arbitrary credit spread numbers.. say i have a 990 short put and to counter that i would sell the 1110-1120 credit call spreads for $1.60 credit , 10 lot ($1600 credit) ... if the stock moves down my short put loses value and credit spreads gain value... as everyone know TSLA can move rapidly in either direction and often times in same direction for many days.. so stock goes down one day, and the next , and the next and my credit spreads are worth .80 ...  50% of max profit, ie i could close trade for $800 debit after collecting $1600 credit to open.

Now here is where i screwed it up as im watching the stock go lower and lower, net net my short put is going further against me and i start to think instead of closing the credit spreads to instead hold them a day or two longer because its a hedge against further downside moves and to milk another couple hundred dollars out of the credit spreads. 

What ended up happening was stock reversed upward again, often rapidly. for this example, all the way past the credit spread strikes.. above 1120, causing the credit spreads to now be at a loss.. moving up so much that the spreads could not be rolled out in time for a credit.. and ended up having to take max loss on the credit spreads.

If i had followed the mechanics i should have just taken the 50% win on the credit spreads and waited it out for the next up move to either close the short put for profit or resell new credit call spreads at new strikes and/or different opex. instead i snatched defeat from the jaws of victory.

in hindsight after reflecting on my process, that "additional/remaining" hedge i thought i had by holding the credit spreads really didnt amount to many dollars and indeed had huge risk. This process works in both directions but ive been burned a couple times with holding the call credit spreads too long.

Solution is to remember these huge losses and just take the 25-50% win on the credit spreads and move on to the next trade.. no emotion.. just looking at numbers. I also have to keep reminding myself its VERY easy to roll short puts out in time and down before you have to take the loss.. barring margin calls of course.. may have to go out in time a few weeks if necessary. credit spreads are much harder to roll for flat/credit once the outer strike is breached.

Bottom line.. take those profits and move on.