Rolling Strategies To Repair In-The-Money Credit Put Spreads

On the members forum an investor asked for help with his trade in Kraft Heinz Stock (KHC) where he has found his credit put spreads caught in-the-money as the stock turns lower. Let’s look at this questions and then discuss some rolling strategies as well as how to approach a repair for this trade.

Investor Questions:

Hi Teddi,

I am having trouble rescuing my put credit spreads in KHC.

On Dec 29, 2020, I initially sold 5 JAN 8 $34 puts for $.232 each and bought 5 JAN 8 $31 puts for $.058 each.

$34 seemed to be minor support and had also been a support area in July 2020. If I was wrong I thought that I could roll down.

On Jan 8, with KHC below 34, I rolled out as follows:

Cost to buy back the 5 $34 short put = $285.

I then sold 2 Jan 15 $34 puts for .80 each and 3 Jan 15 $33.5 puts for .53 each. I bought 5 Jan 15 $30 puts for .03 each. This brought in $304. So my roll was barely profitable, but I did manage to roll some puts down to 33.5.

Unfortunately, KHC is continuing to decline. Buying back the 34 puts today would cost me 1.94. Taking into account the cost of purchasing a long put (for protection and lowering margin req), I would have to go out to April 16 where I could sell the $32.5 puts for 2.25 (and purchase the 17.5 put for 0.06). That still leaves my short puts in the money and is 3 months out…leaving plenty of time for KHC to decline even more.

The Jan 15 $33.5 puts could be rolled down to $33 but I need to go out 1 month to Feb 12…again plenty of time for KHC to decline.

I have 2 questions:

1. Why am I having so much difficulty in rolling down my put credit spreads profitably? Where did I go wrong?

2. How do I rescue this trade? (I would prefer not to own KHC as I don’t see any calls that would allow me to exit profitably. If there is a way to exit profitably by accepting assignment, I am open to it. I would also prefer not to tie the funds up for a year with a LEAP).

I would appreciate your input, and thank you in advance.

Some Answers

This article is 2500 words in length and requires 6 pages if printed. It looks at a number of rescue and repair strategies that could be considered and how they could be implemented. It also discusses the decision-making process for knowing when to apply a repair and when to take a loss and move to a new trade to recover the loss. These strategies can be applied to any equity.

  This strategy article is for FullyInformed members.

Rolling Strategies To Repair In-The-Money Credit Put Spreads on KHC Stock – Investor Questions

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