The trade is no longer neutral, as it was when the underlying was at $90.
It now has a delta of −2.54, which is like being short 254 shares of the
underlying. Although the more time that passes the better—as indicated by
the +0.230 theta—delta is of the utmost concern. The trader has now found
himself short a market that he thinks may rally.
Closing the entire position is one alternative. To be sure, if you don’t have
an opinion on the underlying, you shouldn’t have a position. It’s like
making a bet on a sporting event when you don’t really know who you
think will win. The spread can also be dismantled piecemeal. First, the 85
puts are valued at $0.07 each. Buying these back is a no-brainer. In the
event the stock does retrace, why have the positive delta of that leg working
against you when you can eliminate the risk inexpensively now?
The 80 puts are worthless, offered at 0.05, presumably. There is no point
in trying to sell these. If the market does turn around, they may benefit,
resulting in an unexpected profit.
The 80 and 85 puts are the least of his worries, though. The concern is a
continuing rally. Clearly, the greater risk is in the 95–100 call spread.
Closing the call spread for a loss eliminates the possibility of future losses
and may be a wise choice, especially if there is great uncertainty. Taking a
small loss now of only around $300 is a better trade than risking a total loss
of $4,200 when you think there is a strong chance of that total loss
occurring.
But if the trader is not merely concerned that the stock will rally but truly
believes that there is a good chance it will, the most logical action is to
position himself for that expected move. Although there are many ways to
accomplish this, the simplest way is to buy to close the 95 calls to eliminate
the position at that strike. This eliminates the short delta from the 95 calls,