How to defend a credit call spread? Tom Sosnoff and his daughter Case explains how to defend a call spread which goes against you.
Interesting explanation of what should a trader do if a credit spread goes against you. With Tom’s view, everything I have ever done to defend my spreads was wrong.
Here is an example of what a trader can do (excerpt from the video above):
We have a stock XYZ is trading for $50.
We sell 55/57.5 call spread (55 strike being the short) with 45 days to expiration (DTE) and collected 0.80 (or $80) premium. Here are a few scenarios what you should do:
XYZ is now trading for $52.5 with 29 DTE – leave it
XYZ is now trading for $55.0 with 29 DTE – leave it
XYZ is now trading for $56.0 with 29 DTE – leave it
XYZ is now trading for $57.5 with 29 DTE – leave it
XYZ is now trading for $59.5 with 29 DTE – leave it
And now, here is a different situation:
XYZ is now trading for $55.0 with 7 DTE – roll it into the next month
XYZ is now trading for $56.0 with 7 DTE – roll it into the next month
XYZ is now trading for $57.5 with 7 DTE – roll it into the next month
XYZ is now trading for $60.0 with 7 DTE – leave it and hope for a miracle that the trade may return back before expiration, and if not, take the full loss.
Leave a Reply