For the FAQ (I've been working on this over the weekend, but just finished it up)
Managing Spreads
As I see it, there are 3 main categories of management: Closing, Transforming, or Adding Leverage. I'm going to list out the management strategies that I've collected from the forum and then my thoughts on which ones work best. I don't credit most because it didn't occur to me to grab anything other than the text at the time. So apologies for that. To be clear, very few of these ideas are directly from me, and I've only used a few of them in practice.
Closing:
1, BTC the position. This is the simplest and cleanest management strategy. If you do it quickly enough, it's the least painful. The risk is that the position was actually just fine if you had left it alone. Many times that's true. When we fail to follow this strategy and we're wrong about a recovery, we move into the strategies below.
2, BTC half the position. When in doubt, do half of what you planned to do. This will likely result in either zero loss (or a small gain, depending on when you closed), if the rest of the position recovers, or half the loss, if the position continues to go against you.
3, BTC the short side of the position and let the long side run. If you're convinced the SP will keep moving against you, close the short side of the spread and the long side will continue to increase in value, possibly turning a losing trade into a winning one. The risk is that you're wrong, and the stock recovers, in which case you've lost twice and your long position may even expire worthless. Obviously this works best with narrow spreads where the long leg will go ITM more quickly.
4, BTC the long side of the position and let the short side recover. If you think the SP will go back in your direction, but not far enough to rescue your spread, you can sell the long side at what you think is top/bottom. At that point have a naked ITM option to manage. You can close this if it recovers or manage it as you would any ITM open single option position. This may be easier to roll and manage than a spread, but you're also giving up defined risk for unlimited risk.
5, BTC half and form an Iron Condor. Eg, if you have an ITM BPS, close half and open a BCS margin free. This may reduce overall margin requirements, but of course you're at risk with both up and down moves now, and it may be hard to open a position you would have opened anyway for good premium.
Transforming: (these are margin neutral)
1, BTC the position, STO any new position with equivalent credit. There aren't any limits to what you can do to manage a position in this way, but a general rule of thumb is to only open a managing position that you would have been happy to open if you weren't also trying to fix a mistake.
2, Roll it out and/or up. You're BTC the old position and replacing it with a new position a week or more out and at a better srike for approximately the same credit. For a spread, unlike a single position (CC or CSP), you don't want to wait until the end of the week to gain the most from theta, as your long side will lose theta faster than your short side will benefit from it. If you're going to do this, I think it's better to make this move ASAP to minimize the loss from detla. Ideally you want to do this before the SP touches your short strike, but you can usually roll for even credit so long as the SP doesn't hit the midpoint of your BPS. One thing to note is that as soon as you roll, your losses (or recovery) will slow, since rolling out in time and/or up in strike will lower the delta of the position.
3, BTC the position and STO an equivalent credit of the other side; eg, changing a put spread into a call spread. Also known as the flip roll. Great if you think the stock price is probably not heading back your way and you're too far ITM to play catch up.
4, Roll/convert the short side out to an ITM short opposite (STO call if you are managing a put or vice versa), keep the long side. Both make money if stock goes in the direction you expect, but both lose if it doesn't. Similar to the "flip roll" but you're no longer in a spread.
5, When the SP is in an obvious range, BTC at one end of the range and STO at the other. Eg, if you have DITM calls to repair, and the SP is range bound between 1220 and 1240, BTC the position at 1220 then STO it again at 1240, reducing the premium, or changing the strikes or time for the same premium. The risk here is that you're wrong about the range and get stuck.
Adding Leverage: (these generally increase margin requirement or risk)
1, STO the same position at a higher credit. Doubling down on a losing position that you think will recover partially but not fully will allow you to close at even credit twice as quickly. The risk is that you're wrong about the stock price move (or get greedy waiting for exactly even) and end up losing money twice as fast instead.
2, BTC long side, halve the spread and STO twice the contracts. Again, you're doubling the position, but this time without adding extra margin to it. This will either recover twice as quickly or fail twice as quickly, and you're also reducing your options to roll, as a smaller spread width provides fewer opportunities to roll.
3, STO and form an Iron Condor, no additional margin necessary. Use the resulting premium to improve the problem position. You can continue to roll the whole position, or let the reparative half of the IC expire and just roll the problem position again.
4, BTO additional long contracts in the long leg of a problem position. For example, let's say you're in a -1100c/1150c BCS with 10 contracts. Roll it to the next week as -1100c x 10/+1150c x 11 instead of improving strikes. This will keep the spread from going underwater as quickly if it continues to move against you, as the extra long strikes will gain money more quickly than the short strikes will lose it. I haven't done the math on this one, so it may be necessary to add additional money to the position in addition to the premium from rolling to get the correct ratio.
5, Convert to debit spread by moving the short side beyond the long side away from the money. Eg, if the SP is at 1000 and you have a BPS that's -1050p/1030p, you can BTC the 1050 and STO at 1010, making at 1030/-1010 debit spread. This will incur a debit, but if the SP falls, you now make money instead of losing it.
Summary/tips:
1, Remember that you can apply any of these strategies one contract at a time, and that you are not limited to a single strategy to repair a problem position. Eg, you can roll up and out AND form an Iron Condor AND add long contracts to the new position.
2, Always ask yourself, "would I open this new position if I didn't have a problem to fix?" Try to avoid digging yourself in deeper.
So in summary, my personal opinion is that it doesn't hurt to carry some small long term rolling positions (especially single options, not so much spreads) that are against you in case of a huge move in the other direction. But if you're going to close a problem position, just close it then redeploy the capital however you would normally have done so. That's 90% of the strategies here. The few strategies I like are forming an Iron Condor with the rolled position (because it's margin free), adding long contracts when you roll (because I would never have thought of that! I haven't tried it yet, but I like it) and just BTC.
Rolling spreads is much more complicated imo than naked puts or CCs. The problem is that you're losing theta with the long leg faster than you're gaining it with the short leg, and that can add up fast. So I generally just BTC, hopefully even, when I get nervous about it. However, if you've got a massive 100 contract position (which I hope to do soon), you may need to study under the master,
@Yoona . Check out her great post here sharing how she handled the historic run up in October:
Maybe we hit the top, and the profit taking can start. I probably took serious losses for nothing (other than I kept from being wiped out if the climb had continued). We'll see if I'm calling it too early. In my selling frenzy, I missed that I still have 1100/1150s for next week that I had...
teslamotorsclub.com
Finally, one strategy that I found for managing single options that I wanted to include:
STO the opposite type of option (calls or puts) at the strike of your problem position, forming a straddle. This is risk free money, since only one of these can go bad, and you already have a bad position here. Use those funds to improve the strike of the problem position, forming a strangle. Eg, if you had a short 800 call option, form a straddle with a short 800 put, then use that premium to roll the 800 call up to say 850 and form an inverse strangle.
Hope this was helpful! Please add more strategies or corrections to this if you have them as replies, and I'll edit. Then we can add it to the FAQ.
