Adjusting Call Ratio Back Spread: XLF -> NRZ

Updated: 23 April, 2020 seen 69

Call ratio back spreads is my second favorite option trading strategy, after covered calls. 

In today's article, I'm going to share how I adjusted (with a small loss) a suffering call option with an expiry set in just two days.

But before that, here is my original setup:

On March 25, 2020, I opened the following trade:

  • Sold 1 call XLF 21 Apr 9'20 @ 1.25
  • Bought 2 calls XLF 23 Apr 9'20 @ 0.46

As you can see I was selling a ratio call back spread here and made a small premium of $25.80 (after commissions).

Fast forward to April 7, 2020, and XLF is trading around $22.18-$21.50 - just in the middle of my strike prices. It should stay under strike price of 21 on expiry or climb above strike price 23, and I would start to earn some additional income.

XLF Trading price on April 7, 2020

XLF Trading price on April 7, 2020

Now, with two days left till expiry, I didn't want to take a risk of possible early assignment, and I decided to close the position with a loss (but leave a room for a potential comeback) and open new positions on completely another financial instrument - NRZ

So I closed the call I sold (bought it back) for 1.07 and kept a little profit of $13.20 (after commissions), but left my two bough calls (23 strike expiry) open, in case XLF will surge above 23 strike price in the next two days I will make a nice income, if not I will lose the premium paid 0.92 or $92 on the expiry. 

My max loss on this trade: - 92-13.20= -$78.8

With time on my side, I still had a hope to break even or make an additional profit in the next two days. 

But as I was freed up some margin, I straight jump to open a new position, I could go for XLF, but I decided to jump to another instrument - NRZ stock

Unlike XLF, NRZ is a stock, and as I have this stock in my portfolio I decided to jump from a call ratio back spread on XLF to put ratio back spread on NRZ.

  • Sold 1 put NRZ 4 May 15'20 @ 0.80
  • Bought 2 puts NRZ 2 May 15' 20 @ 0.2

I booked a nice $40 (before commissions) premium from this trade.

Here are possible scenarios what can happen next with NRZ

  1. On expiry day (May 15, 2020) it trades above the strike price of 4 - very well, options expire worthlessly, I keep premium
  2. On expiry day NRZ trades in the range $4-$2 per share, my max loss here, but as I already wanted to take these shares  - I will have to pay $400 to take 100 shares of NRZ
  3. NRZ might be trading less than $2 per share on expiry - very well, my second bought put will do the job and additional income will be made,
The Bottom Line

When trading options I have found for me it works the best to trade them on stocks I don't mind to hold for a long time