on the following strategy regarding the underlying equity:
Buy 4 RRCMJ 50 Jan Puts @ 1.80
Sell 4 RRCOJ 50 Mar Puts @ 3.60
Net Credit 1.80
RRC will pull back below 50 during January. However, during
Feb and/or Mar RRC will advance above 50. What thoughts do
you have on managing this position and/or risk factors.
You sold a calendar spread. This is an unusual action for an individual investor take because
calendar spreads are bought far more often than sold. Nothing wrong with the trade, it's
The major problem with managing the risk of this position is that time is the enemy. Your
position requires that something good happen - and fairly soon. If January expiration arrives
and your put expires worthless, or is only ITM by a small amount, that is not going to leave you well
placed. You will be naked shot the Mar 50P. That's not so bad - based on your expectations, but if
you are wrong, can you afford to hold this naked short put?
The ides of selling the calendar spread requires a substantial change in PRC stock price for success.
A big move in either direction allows you to exit the trade with a profit.
When Jan expiration arrives, If your put is ITM, as you suspect, it would not be right to exercise the puts
and take a short position in the stock - especially when your expectation is that the stock will rally in Feb
or March. You will be forced to sell the put.
That makes me ask: why do you want to buy this Jan put? If you believe the stock will be above 50 at Mar
expiration, why not just sell the March 50P naked, instead of selling the spread? Or even better, for
additional safety, why not sell the March 50P and buy the Mar45P?
Tony - I don't really have any good recommendations because I don't understand what you are trying to
accomplish. If you believe the stock is heading lower before rising, you can sell Mar puts later - after the decline.
Mark D. Wolfinger