BIDU is hitting our risk limits and we need to adjust. We will do this by rolling the spread down and out, and then aggressively scale out of the trade.
Here is some further analysis on the stock. It’s currently down 6 days in a row, and over the past 10 days has seen a 7% selloff. It’s quite oversold, and coming into support. I’m still comfortable holding onto long deltas in the trade, but will need to manage risk by rolling out.
The original trade setup was this:
Expected Price: 187.50
Sell to Open BIDU Jul 175/170 Put Spread
Tier 1: Enter at 0.90, Exit at 0.30
Tier 2: Enter at 1.20, Exit at 0.90
Tier 3: Enter at 1.50, Exit at 1.20
So the trade is at a full tier 3, with an average basis at 1.20. The current value of the spread is 2.25 with about 30 days left to expiration.
What we are going to do is close this trade, and open an August spread, effectively rolling the trade out. This puts us in the trade for a little while longer. We’re going to aggressively scale out of the trade, which basically locks in a loss, but we will look to scale back in if and when the stock sells off again.
Risk management adjustment
Buy to Close BIDU Jul 175/170 Put Spread @2.25
Sell to Open BIDU Aug 165/160 Put Spread @1.32
Scaling Out Trade
Buy to Close BIDU Aug 165/160 Put Spread
Tier 3: 1.00, Re-open at 1.30
Tier 2: 0.70, Re-open at 1.00
Tier 1: Hold until opex.
By aggressively scaling out then working back in, you take cash off the table and continue to work your basis down.