Recovery Plan 2.0 Ratio Back Spreads

Updated: 13 March, 2020 seen 128

On March 12, 2020, markets tanked more than 20% from their all-time high's in February, I faced a margin call, my positions were force liquidated - nothing good.

I took a direct loss of more than $2,500 from sold stocks with a loss + additional $2,000 from closing put options on bad performing dividend stocks. 

in fact,  my original plan to recover from bad managed options trades back in November 2019, when I decided to sell puts on dividend stocks, see: Recovery Plan Using Naked Puts on Dividend Stocks

For this time I plan to be even more conservative - I will use ratio back spreads + will write put options on good dividend stocks only. 

Recovery starts now, Friday 13th, 2020. 

  • Cash: -EUR 4,810
  • Buying power: EUR 3,051

Unlike in the past - my goal is to get cash balance positive or at least 0, I won't use buying power to buy more shares. I will use buying power to sell/buy ratio back spreads. If properly set up these can make a good income, but as always adjustments are needed.

Here is an example call ratio backspread I opened today to collect the little premium and leave a room for "unlimited" profit

  • Sold 1  call XLF 22 May 01 @ 1.92
  • Bought 2 call XLF 26 May 01 @ 0.43

Here is what can happen next. XLF keeps failing (together with rest of the market) I keep the premium $106 (1.92-(2*0.43)), XLF raises well above 26, say to 30 (which is nothing impossible) I make $106 + $400

XLF might end in the middle somewhere between 22 and 26 by May 1st, if so I should calculate my break-even points (which is 23.06 for the short leg). It's planned to adjust if XLF looks to settle in the middle.

I hope to get my cash balance down to 0 in the next 6 months (Around September/October 2020)