Credit Spreads and Market Collapse

What can I say that you have not already read on every other web site, in a newspaper, or heard on radio or television?

This was a huge sell-off!

Let's get a couple things straight. You could not have predicted this. These things can and do happen in the market and you need to plan for them. It has to be part of your trading methodology.

If you were short a put spread on one of the indices, chances are you'll experience a loss this month. Your job is not to avoid the loss, your job is to minimize the loss.

We have experienced a change in trend. This is when our credit spread strategy is vulnerable to a loss. Limit the loss and earn it back over the remaining months.

So, how is CROX doing? Like the rest of the market it sold off, too. My trading plan has me holding the position unless the stock breaks below my long strike. That gives me the option of taking assignment on the stock, closing the spread for a partial loss, or rolling the spread forward.

This market changed my thinking somewhat. I am short the 45/50 bull put spread. I decided to roll into an iron butterfly by selling a 50/55 call spread. This increased my credit by more than double. The bigger credit has reduced my maximum risk. The "price" I paid is that my profit is now dependent upon CROX remaining in a range.

If CROX holds current price levels I'll hold the trade heading into expiration.

The futures are trading higher this morning. Let's see what happens!