In a comment on one of my previous posts on some big-money options trades on the silver ETF (SLV
), pmorg4 noted that he’d purchased some puts on the ETF at a very opportune time:
I bought some $37 May SLV puts at $0.19, and current value is $3.45, having been over $4.00 a few days ago. I am still holding the options for now, but I may close them out early next week depending on how the market moves.
Unfortunately, I didn't put almost $1m into the trade, unlike the traders mentioned in the article. Still a nice little return!
I should add that I'm still long term bullish on SLV, but I currently have no holdings as I took profits as the price dropped toward $40.
That is indeed a “nice little return,” but is there a way to lock in some profits on a trade like this early? After all, those May options expire in less than 2 weeks.
First, let me point out that the trades mentioned in this post are theoretical, based on what a trader could have done as of the close on Friday May 6. By the time you read this, SLV (and their options) could be trading who knows where. But a review of various position adjustment strategies might help you trade options in other ETFs and stocks.
I don’t know how many options pmorg4 purchased, but let’s say you bought ten of those 37 puts contracts for a total of $200 including commissions. Given the options were worth $3450, selling a few of these could lock in profits now – or you could just close the position.
Here’s a look at the theoretical profit position of this trade at various times until expiration. I used three scenarios, one assuming constant volatility, one assuming volatility rises by 20%, and one where volatility falls by 30%.
As you can see, while the trade was profitable as of Friday, those profits could slip away if SLV rises, especially if volatility falls.
So are three other ideas to consider for locking in some gains.
1. Create a vertical spread
As of Friday, you could have sold lower strike puts against your position, perhaps the May SLV 34 puts. Those could have been sold on Friday for around 1.67 or $1670 for ten contracts. That creates a vertical put spread: Long the 37 puts and short the 34 puts.
Combined with the $200 spent for the original options, that results in a net credit of $1470 (including commissions), which locks in a net profit of at least that amount. The downside? The net profit is limited to around $4500 because of the short calls at the 34 strike.
Higher volatility would help this position a bit if SLV rises, while lower volatility tends to help the spread of SLV falls. At expiration, of course, volatility doesn’t really matter.
2. Leg into a butterfly spread
I’m not usually wild about butterfly spreads because, although the risk is limited to the debit paid, those spreads don’t profit unless the underlying stock moves into a certain range at a certain time.
But If you were already long ten May SLV 37 puts for $200, you could “leg into” a butterfly spread with a guaranteed profit. There are many alternatives, but let’s say you kept your original 10 May SLV 37 puts, and then sold 20 May 34 puts while simultaneously purchasing 10 May 31 puts.
As of Friday, you could have entered that trade (selling 20 of the 34 puts and buying 10 of the 31 puts) for a net credit of $2360 (including commissions and the original options purchase)
As you can see, you essentially lock in that $2360 as your minimum net profit with the potential for more profit the closer SLV ends up to being near 34, the strike of the short puts. As expiration nears, lower volatility helps the position if SLV stays near the 34 level.
3) Create a calendar spread
The original trade was the purchase of May 37 puts on SLV. What about exchanging those for June 37 puts? That would cost money, but one could sell May 34 puts to help fund that expense.
That creates a calendar spread because you’re long options that expire June while being short options that expire in May.
As of Friday, that trade could have been executed for a $785 credit. Combined with the original purchase, that’s a net credit of $585 to create a new position of being long June 37 puts and short May 34 puts. You keep that $585 credit even if the June puts expire worthless.
This chart shows the theoretical value of a position like this and how volatility can impact this position.
Keep in mind that while the chart shows the position’s value until the May puts expire, you’d still own June puts that will trade for another month. That may give you an opportunity to sell another set of June puts against your long puts to collect some extra premium.
Clearly, pmorg4’s trade worked out well and it may be a good idea to just close the position and move on. But there are always ways to use options to lock in some gains while maintaining a bearish, neutral, or even bullish position.
Disclosure: I am long SLV.