Ever had a put option trade go seriously south, like way deep in the money? It happens, even to the best of us. Picture this: you’ve tried some smart moves, rolled that put option down and in time, but the trade’s still stuck. Feeling the panic vibes? It’s a common struggle among traders. You could hear it in the trader’s voice – the hesitation to admit defeat, the tendency to roll trades endlessly. Now, let’s tackle this together. We’re diving into six practical strategies, each a tested lifeboat, ready to rescue a sinking trade and steer it toward success.
1. Box it off on the call side. When faced with the challenge of a put trade turning sour, my go-to move is often ‘boxing it off’ on the call side. The key here is selling an out-of-the-money call. This serves a dual purpose — expanding the range for potential success while providing an opportunity to collect extra premium. You’re creating a scenario where you’re collecting additional premium, and you’re widening the range in which your trade can be successful.
2. Strangle it off (sell an OTM call). In periods of heightened volatility, my recommended strategy is to ‘strangle it off’ by selling an out-of-the-money call. This tactical move isn’t just about creating space; it’s about capitalizing on market fluctuations while maintaining a bearish stance. You’re giving yourself more room. You’re strangling it off so that you’re selling the put, selling the call, and you’re widening the range.
3. Straddle it off (sell the same strike call). The allure of the straddle strategy lies in its ability to neutralize directional risk. Selling a call at the same strike as the put sends a powerful message — indifference to the market’s direction. You’re essentially straddling it off, taking both sides, and saying, ‘Okay, I don’t care which way the market goes.’ By adopting a straddle, you express a neutral stance, embracing uncertainty in market direction and focusing on premium collection.
4. Sell a put ratio (add more risk). For those inclined toward a bolder move, the ‘sell a put ratio’ strategy can be intriguing. Adding more risk to the trade amplifies profit potential, especially if the market takes a favorable turn. You’re selling a put ratio, which means you’re adding more risk. You’re giving yourself a chance to make a significant amount of money. However, it’s essential to note that while this approach can be effective, it’s typically more suitable for ETFs than individual stocks. Adding more risk demands careful consideration, and this strategy might not be the best fit for every situation.
5. Jade Lizard it off (sell a call spread). My personal favorite, the ‘Jade Lizard’ strategy, involves selling a call spread while retaining the original put. This delicate equilibrium strikes a balance between risk and reward, almost like a poor man’s covered call. It allows you to navigate the complexities of the market with a nuanced approach. The Jade Lizard is a nuanced approach, balancing risk and reward, offering a more sophisticated way to handle complex market scenarios.
6. Call ratio backspread (call backratio). The ‘call backspread’ strategy introduces asymmetry to the trade by selling one call option and buying two or more calls at a higher strike. This creates asymmetry, meaning you’re defining your risk on one side and giving yourself unlimited upside. The call backspread introduces an asymmetrical element, allowing for unlimited upside potential while carefully defining risk.
In conclusion, these strategies aren’t just ideas on paper; they’re battle-tested tricks I’ve learned through my own trading experiences. The main idea here is to be adaptable, stay flexible, and use a smart understanding of these options tricks to handle the ups and downs of the market. For a deeper dive into defending against irrational moves in options trading, don’t miss my previous post and remember, the market is always shifting, so being ready to adapt is the key to long-term success.