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Options Theory Blog: Rescuing a Losing Bull Put

June 2, 2022

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We’re fans of Advanced Micro Devices (AMD) in my Team Phoenix Trading Lab. It’s a growth stock with plenty of volatility to make credit spreads a compelling trade. It also has a history of rewarding dip buyers. Recently AMD was showing relative strength versus the broad market and the tech sector putting it back on our radar.

Today I want to illustrate how we managed an April $100/$95 bull put spread when AMD fell 33% after we entered the trade. Let me start by chronicling each step along the way.

AMD Bull Put Management

  1. On March 23rd, AMD was flashing a bullish breakout pattern at $117. We sold the first tier of an April $100/$95 bull put spread for 53 cents.
  2. The first week of the trade went swell but AMD suffered a nasty breakdown on March 31st. By April 7th AMD had fallen to a long-term support zone at $100, prompting us to add the second tier of the April $100/$95 bull put for 92 cents. At the time we only had about 7 days left to expiration.
  3. Unfortunately, on Monday of expiration week, AMD cracked the $100 support zone, which was also our short strike. I gave it a day to recover and the next morning it did gap higher but got sold immediately. Rather than hold through the elevated gamma risk of the final 3 days, I opted to close both bull puts for $2.45 on April 12th. We lost -$1.92 on the first tier and –$1.53 on the second tier. As bad as the loss was, had we held to expiration, would have incurred a max loss of around $4.50, so I think the exit was smart.
  4. We could have abandoned AMD altogether at that point, but I wanted to recoup losses and still thought the stock would eventually rebound. We just needed more time. So, after exiting the April bull puts, I sold the May $80 naked puts for $1.80. I switched to naked puts simply because it allowed me to go further OTM while receiving enough premium to recoup our loss. Also, I sold two tiers right off the bat since I had two tiers of the April bull put that I lost on.
  5. Fast forward to May 4th. AMD had a strong response to earnings putting us well into profitable territory. I wanted to lock in some gains so I exited tier one for 75 cents and captured $1.05 profit.
  6. On May 10th, we were approaching expiration and AMD was messy so I exited second tier at $1.50 to capture a 30-cent profit. All-in I recouped $1.35 of loss for May expiration.
  7. On May 10th, once I closed the May $80 naked put, I opened two tiers of the June $70 naked put for $1.68. This moved us $10 further OTM while giving a chance to recoup the rest of the loss.
  8. Fast forward to June 1st and the June $70 naked puts fell to 12 cents in value. We closed them to pocket $1.56 of the potential $1.68 profit. With two tiers, that captured a profit of $3.12.

Trade Summary

Here’s how I would summarize the management decisions.

  • First, we rolled down and out instead of only exiting the April bull put and going to cash.
  • Second, we converted from an April bull put to May naked puts to get a bigger credit and recoup losses quicker. This did increase the cost of the trade.
  • Third, we avoided holding May all the way to expiration and instead exited early to reduce gamma risk. In hindsight, we could have stayed in longer and would have made more money for that month.
  • Fourth, at June’s exit, the stock was still nearly 20% lower than our original entry price and yet we had recouped all losses and put ourselves back into the green.

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