collected, but it will also limit the potential
profit on the position.
The result: A few good things can happen.
First, your total dollar risk is reduced.
Second, your trade should now be able to
withstand a greater reversal in the stock’s
price, or a drop in implied volatility. Finally,
your trade might still profit if the stock once
again moves in the desired direction.
The situation: If it’s a short put position that’s moving against you, then either
the stock is moving lower, the implied vol is
ticking higher, or possibly some of both. It
might be a good time to sell an at-the-money
(ATM) or O TM call vertical to offset some
of the short put’s loss. The short put is a
bullish trade. But selling a call spread is a
The fix: If you think selling the call spread
is a good idea because you believe the stock
is going to keep moving lower, you might
want to close your original trade. But if you
think the move lower is short term, then
selling a short-term call vertical may be a
good fix. The premium you collect from
the call spread is added to the premium
you collected from the put. At expiration,
if the stock is above your short put, but
below the strike of the short call, then all
the options would be expected to expire
worthless and you’d keep the net premium.
The result: Selling the call spread doesn’t
increase your overall dollar risk, but it
could hurt you if the stock reverses course
and moves higher like you originally
thought. Remember, “fixing” a trade is
essentially putting on a new trade. Understand the new trade’s structure and plan
for a new outcome.
The situation: What if you sold an
OTM call or put vertical and now it’s turn-
ing into more of an ATM spread? There’s
usually more than one way of “fixing”
trades that go against you, so here are two
possible approaches for short verticals that
are getting too close to the money.
The fix: First, consider turning your position into an iron condor. If it’s a call vertical
that’s hurting you, you would sell an O TM
put vertical. If a put vertical is to blame,
you’d sell an O TM call vertical. The new
position—the iron condor—wants the stock
to settle in between the short strikes of both
The result: Again, the premium you collect adds to your overall position credit.
Although you haven’t increased your overall dollar risk, you now have more places
where the stock can hurt you. You’ve also
added additional transaction costs.
The second fix: Second, you could consider
rolling into a new vertical spread. If the
stock is threatening to trend right through
your short vertical, turning the trade into an
iron condor might not alleviate losses from
the side that’s getting too close to the mon-
ey. Instead, maybe pack up your trade and
“roll” it to a new neighborhood.
For example, using an underlying stock
price of $80, suppose you sold an 82-84
near-month call spread
for $0.30 with a few weeks
to expiration. Some time
passes, but the stock has
moved higher to $82, with a
week until expiration. You
could consider “rolling” the
spread by buying it to close
for a debit of $0.40, and then
selling to open the 84-86 call spread further
out in time for $0.80. Using the prices in the
table in Figure 3, the roll plus the new ver-
tical can be completed for a credit of $0.50,
not including transaction costs.
The second result: Now your short strike
is $2 further away from the money, giving
you some breathing room. The trade, however, now has more time before it expires.
So you’ll need to monitor things in case you
need to make another decision to roll again
or exit. Finally, remember that commissions can really add up.
EVERY “FIX” HAS PROS AND CONS. BUT
you can cut your losses by selling options
premium elsewhere without necessarily
cutting the trade. If you do, you can potentially amortize your loss, and hang around
a little longer to see what happens next.
This is what many pro traders do automatically—look a losing position in the eye and
know what to do.
Kevin Lund is not a representative of TD Ameritrade,
Inc. The material, views, and opinions expressed in
this article are solely those of the author and may not
be reflective of those held by TD Ameritrade, Inc.
For more on the risks of trading and trading
options, see page 37, #1– 2..
FIGURE 3: Roll with it. You could open a call spread
that has more days to expiration.
For illustrative purposes only.
DAYS TO EXPIRATION STRIKE CALL BID CALL ASK
7 82 0.60 0.65
84 0.25 0.29
50 82 2. 20 2. 35
84 1.35 1.40
86 0.65 0.75