We hold ten put spreads: long Feb 20 132.50 against short Feb 20 130 puts. Although we legged into the spread for 6 cents, a loss that we took on 200 shares bought as a hedge at 133 has effectively raised the cost basis on our spread to 77 cents. Since it could widen to as much as $2.50, there is potentially $1.73 profit in the spread, or $1730 for the entire position. Since our long-term bias is still bullish, I’m going to suggest simplifying our playbook by exiting the put spread. Accordingly, you should offer the spread for 1.80, day order. This is a fair price with TLT trading around where it closed Thursday, 129.78. But if the stock (ETF) moves lower, you can raise your offer accordingly.
The best way to determine the spread’s fair value is to monitor the bid/asked for the options as TLT’s price fluctuates. Do this for just 10 minutes and you’ll be an instant expert on that particular spread. Practically speaking, the best price you’ll be able to achieve will be roughly midway between the bid and offer. To take an example, if you are long a call that is quoted on a bid-asked spread of 1.20/1.30, and short a call that is quoted at 0.50/0.60, the highest price you could get for selling the spread would be 0.80. That would imply closing the long side on the 1.30 offer and covering the short side on the 0.50 bid. The cheapest you could buy the spread on those markets would be 0.60, and the midway price would be 0.70. ______ UPDATE (Feb 13, 5:03 p.m.): The put spread was “marked” at the close at 2.15, the low end of the bid/asked range, but it could have been sold intraday for as much as 2.35. Officially, I’ll record a 2.00 sale, giving us a gain on paper of $1,230. Some subscribers may have done better, but it is unlikely that anyone who held the position would have done worse. Our next gambit will be to get long again, so stay tuned for possible bottom-fishing instructions.