Are you the type of trader who likes your profits as soon as you can get them or would your rather let them ‘run’ with the potential of a much larger profit later? Not sure? Maybe a little of both types? Here’s what I typically do. As a trade progresses with a profit I like to try to eliminate all of my initial cost in the trade first. Net zero cost! Then if the profitable trade continues in the expected direction I’ll often realize some additional profits by selling even tighter spreads but that’s for another time. Lets first look at how I got to $0 cost on today’s SPX trade. Here are the two transactions I made in SPX today.
I bought some $75 wide Put Vertical Debit spreads for $19.40 each this morning. SPX dropped sharply soon afterwards and the position turned quite profitable. Near the end of the trading day I was sitting on a nice profit which I could’ve realized but I still think it’s likely that SPX will continue lower before there’s a substantial bullish reversal. Should I close the position or keep it? I like to compromise. I’ll keep the position but I’ll adjust so that I eliminate all of my initial at-risk capital while still maintaining a large potential profit. I did that by rolling down my long Puts and, in the same transaction, selling some OTM Put Vertical Credit spreads for a $19.40 Credit. That’s the same amount that I paid for the original spread so my net cost is now $0. Zero. Nada. Zilch. You get the idea. So what’s the position look like now that I’ve made that second trade? See below.
That ‘adjustment’ trade reduced the net cost to $0 AND it reduced the Delta (directional) risk of the position from -118 Deltas to -27. That is a serious reduction in risk if SPX moves higher. In fact, even if SPX rallies as much tomorrow as it dropped in price today, my position won’t go back to no profit. It’ll likely have around a $2,500 profit if that happens. How many times in the past have you had a nice profit one day only to give it all back the next day? If that happened all the time the solution would be easy, just close the trade out and take your profit. However, how many times have you taken a profit on a trade only to see price continue in the direction you expected and you missed out on those additional profits because you closed out the trade? This solution finds a happy medium between both those examples!
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