Losing trade - not sure what to do

Discussion in 'General Discussion' started by spanturu, May 25, 2018.

  1. spanturu

    spanturu Member

    Hello all, I am looking for some advice on for a trade that I currently have on.

    At the beginning of the month, I placed an ATM butterfly in the RUT, June monthly expiration cycle. A few days later, I had to urgently leave the country to tend to the failing health of a loved one; that loved one passed away and I ended up being gone for almost 3 weeks. I did not manage any of my positions in this time due to the stress, mourning, etc.

    I returned earlier this week to find the RUT almost 100 points higher than where it was previously. Needless to say, my trade is drawn down well past the max loss number. Normally I'd take the loss but I feel that after such an explosive rally in the RUT, we are due for a pullback. On the other hand, after this long weekend there will only be 13 trading days left until expiration - not a lot of time left for the market to come back under the tent.

    This is what the trade looks like after I rolled some of my put credit spreads up to take off some upside risk. The upper break-even is around 1617, only 10 points below the close today.

    Attached Files:

    Last edited: May 26, 2018
  2. Marcas

    Marcas Well-Known Member

    Hi spanturu, sorry for your loss.
    It is really hard to give advice you are asking for as beside given graph there is a lot of factors missing. Trading skill level, trading capital, risk tolerance, time availability to be most obvious. So any advice you get may be good or not good for you. Other way to say it: there is no universal, 'generally good' answer to your question.

    What you can do?
    1) Consider closing this trade.
    2) Take off some upside risk without exposing downside too much.
    - by lifting up right expiration line
    - by widening, 'condorizing' your structure
    - by 'caledarizing' it
    It all depends on what you can and what you want to do, but if you decide to stay in, whatever option you choose try to clean trade a little by eliminating number of strikes. If you choose to go on, remember that you are in period of high gamma risk and any bigger moves can hurt. Good news is that vega wont hurt that much.

    If I had to managed it for you I would leave butterfly structure and lift right to minimize losses or I'd calendarized it.
    If there is a risk that further losses will take you out of the game - close it, and put on something safer.
    Good luck.
  3. status1

    status1 Well-Known Member

    I agree with Marcas it's difficult to know what to do by just looking at the graph without having more information and knowing your situation
    What was the original trade ? How much premium was collected ?What adjustments were made ? how many contracts ? What is the margin and the account size ? Does this include all the adjustments ?
    I know in TOS if you don't show the adjustments the graph looks a lot worse
    I would also consider adding another fly with the short on top of the upper long and thereby rolling it up
    I am not sure if this is what Marcus meant by calendarizing but I would roll out the debit spread and let the credit spread expire than place another credit spread or two depending on how far the debit spread was moved out
  4. spanturu

    spanturu Member

    Hello marcas, thank you for your reply. I have been trading options on indices for close to 2 years now and I have a decent understanding of greeks, adjustment strategies, etc. The margin on this trade represents around 25% of my total capital, and even if I took the max loss to the upside I wouldn't be wiped out. However, it would be quite a significant loss. My risk tolerance is quite high as I am young and 5-8 years from now my income will be much higher than it is now.

    I am aware of the gamma risk as the trade gets closer to expiration. However, being outside of the tent I actually have long gamma and with a sudden rapid move to the downside, profits can pour back into the trade quickly. This is another reason why I am hesitant to close it.

    Lifting up the right expiration line sounds like the best idea, but low volatility + less than 20 DTE means I am getting very little premium for any put spreads I sell. I am also not sure what you mean by calendarizing it, can you please elaborate on this? Do you mean calendars above the money to hedge the upside?
  5. spanturu

    spanturu Member

    Thank you for your post, status1.

    Margin on the trade is around 9000 (to the downside) and upper expiration line is around -6500. currently drawn down 2.6-2.7k

    This graph is with all the adjustments shown, I did not go through the entire trade from the beginning as it's an incomprehensible mess. It started as a 50 pt symmetrical butterfly with shorts at 1550, which was then rolled up to 1575 and then some of those shorts went up to 1600 as well. Longs are all over the place.

    I've strongly been considering adding another fly but my concerns are:

    1) With so little time left to expiration, the flies are very expensive. Over 20.00 debit for a 50 pt fly centered 10-15 pts below the money
    2) The Russell has been incredibly strong lately. I'm a little worried about buying more puts above the market (rolling PDS up) as this will increase my risk to the upside if the RUT keeps rallying like crazy
  6. ACS

    ACS Well-Known Member

    That is an unusual configuration. The trades we usually see: M3, Road Trip, Rhino, Kevlar, etc. have a much more aggressive Delta hedge with the upper expiration line much higher than the lower which would have kept the loss down. To me the most important lesson is to not leave a position on for weeks at a time unattended. Any loss closing it out when you had to leave was likely much less than walking away since it seems like that trade needs to be kept close to or right on top of the market.
  7. AKJ

    AKJ Well-Known Member

    do not fall victim to the sunk-cost fallacy. Winning or losing on a particular "trade", whatever that construct is, is meaningless. Keep the position on if the expected value is positive and better than other alternatives available to you. Close your position if the expected value is negative, or if there is a better position to have on.
  8. Marcas

    Marcas Well-Known Member

    Spanturu, I will not elaborate on calendarizing at the moment, there will be time for this later.

    I will not support your decision, nor disapprove. Each option has pros and cons.
    Unless you have 'deep internal conviction' (to be based on some inside information, tee leaves configuration, TeeA, or similar) your move looks to me like gambling.
    And this is perfectly fine just know what you are doing.
    Good luck.
  9. CATTY

    CATTY Member

    I don't see any "ATM butterfly" can make money! Even M3 is difficulty to make money unless you are very good at Market Trend estimation, because in M3 both Butterfly and Call will cost your money to open and adjust lately will cause your losing more money. Only "Artfully Trader know how to adjust near expiring date and put the position into the tent.
  10. CATTY

    CATTY Member

    I think Cover Call is easiest way to make money, not Butterfly!
    Murphy Tan likes this.
  11. status1

    status1 Well-Known Member

    I agree with ACS the trade should have been closed earlier since it's not going to be managed I was just trying to think if there is any way to rescue this trade This reminds me of the JL's bearish butterfly where you would add another fly 20 points higher as RUT goes up but since it's so close to expiration there is not much that can be done except to take the gamble if you can afford it and hope for a pull back At least it looks like Rut is taking a pause at the moment and may be looking for a small pull back

    You can also close it and take the loss and open a new position further out in time using the current strikes but maybe more simplified that way you have more time to wait for a pull back or make better adjustments
  12. Kevin Lee

    Kevin Lee Well-Known Member

    A few comments :

    1. Firstly has the P&L exceeded your max loss? If it has, then close it. Move on. Don't hope it'll come back.

    2. This structure looks like bearish butterfly. This type of trade has huge gamma. It works well in a market with bearish bias. However, the risk is to the upside and one has to be vigilant in controlling the delta.

    3. When DTE falls below 14, it gets really difficult to trade especially for beginners. Personally, I don't trade so close to expiration anymore, unless it's a really tiny position I don't mind taking a big percentage loss.

    4. Having said the above, you should have a trade plan that has been fully back tested to handle the situation. If you do, then follow the trade plan. If you don't have a trade plan, the prudent thing to do is to exit and not pour good money over it.
    status1 likes this.
  13. Harry

    Harry Well-Known Member

    I will echo what others said: if in max loss, take the loss. Expecting market to move back without any other plan in place is indeed gambling or trading based on technical analysis. If you believe in TA, use that but don’t gamble.

    What would I do? I rarely use the graph and unable to relate to your numbers over the phone screen, so trying to think aloud

    Selling out spreads is definitely an option. Assume the worst case and plan spreads based on that. You say break even is 1610 or something. You don’t need to write a spread all the way below the fly. You can write it closer to the upper edge. If the market falls, you win on the fly you lose on the spread. If the market goes up, you win the spread.

    Roll the fly in time. I don’t know the price calculations of all kind of flies but in general I have been able to roll flies near the money for small change. On one hand it gives you the change on the other hand it gives you time too.

    Mix of the above. Once again I can not relate to the numbers but let us assume you can buy time (roll in time) for a 1000 bucks but write a current week spread to make you 500 bucks (for smaller risk than first option above) it works for me as long as the roll in time was more than 2 weeks as I can then rinse and repeat this. But hopefully you can buy time cheaply anyways.

    But despite all this, I will go back to original question. If you can make / save similar money with new trades, then why not try that instead of trying to save this. Don’t get into this unless you can improve your odds significantly.

    I think this is also a reminder to me and all that such absences can happen and we should right size our trades to handle at least a weeks absence. Sorry for your loss and I sometimes fear such absences will disrupt my account too but have not taken any action to plan if it happens.

    And to the person saying covered call covered call covered call in every thread: I bow to your superior judgement :)

    Sent from my iPhone using Tapatalk
    Murphy Tan likes this.
  14. Harry

    Harry Well-Known Member

    Just saw your chart on computer. You are covered on the downside till 1560 or so. You have a peak profit potential of 8K or so if the price expires at 1610 or so. You do not need that ... if all you are trying to do is to save the trade. Take off some of the flies from the back/lower side and move them over the price. If you can have a wide range with minimal loss + zero profit zone, I will take it if the issue was saving the trade rather than a hail mary of price expires at 1610.
  15. spanturu

    spanturu Member

    Thank you to all who commented. All the studies that I typically use for TA show that the Russell is very overbought/has no energy to continue this rally. Of course, the market can do whatever the market wants to do, but if I were to pick a direction for the RUT over the next 2 weeks I would lean bearish. That is what is keeping me in this trade.

    Yes, you are correct: I am not looking to make a huge hail mary profit on this trade. I am looking into your suggestion of giving up most/all of my potential profit in order to wide out my range and minimize losses. Maybe something like this?

    Attached Files:

  16. Harry

    Harry Well-Known Member

    You still have a big hump in the middle: move it out completely by I guess moving the flies further right. Still feel the need to reiterate that this may not go well if the price continues to go up, but if I really wanted to widen, that's what I would do.
  17. status1

    status1 Well-Known Member

    It seems to me that this last adjustment is worse than the original and may need to be held pretty much into expiration
    Unless it's missing any profit that was already taken along the way
    It doesn't seem worth it based on that graph only
  18. vega4mike

    vega4mike Well-Known Member

    I agree with what most have suggested here especially Kevin.
    My view for whats its worth take the loss, forget about all the potential adjustments & TA, as it just looks like throwing good money after bad, since you are already way past your max loss.
    Think of all the time & energy put into thinking of what to do to save the trade, if the same amount of effort had been piled into another trade after closing this one, you could have potentially made some of the money back. Saving a trade with adjustments vs opening a new one with a fresh view of the market puts you in a better frame of mind psyhcollogically.
    As most great traders will say, if you had nothing on, would you out on the trade as it looks, if the answer is no, then why are you in it.
    Sorry for you loss.
  19. Harry

    Harry Well-Known Member

    If you can trade with TA, you should trade with the TA. With the market down, looks like you were right. Incorporate TA correctly and you can juice your returns quite a bit.

    Sent from my iPhone using Tapatalk
    Murphy Tan likes this.

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