After big moves like this in the market, and especially when it reaches levels where you have a hunch the run could stop, (it does stop at some point, right?) It’s smart to look to your ‘wings’ in your options positions. If anything is so cheap you wouldn’t be short it on its own, buy it in. So for instance, if you are long a put spread that has gone against you in this rally look at the price of the lower strike. If it’s trading next to nothing, think about closing it and being naked long the higher put. If the market reverses, you can always sell it back out at a level where the premium on the option means something again… it’s a good way to play for a reversal without taking on much additional risk.And the only thing you are really sacrificing is that last bit of premium on the option if the market were to continue higher.
A good example would be when Dan rolled down and out his winning trade from June in LNKD on June 17th.
TRADE: LNKD ($66.16) Buy July 60 / 50 Put Spread for 2.40
-Buy July 60 Put for 3.50 and
-Sell July 50 Put at 1.10
In this example the stock is now trading at about 90.00 and the spread is essentially worthless with a little more than 2 weeks to expiration. While I probably wouldn’t sell the July 60 put at .30, I might consider covering the July 55 Put for .20 Both options are way out of the money now, and while we generally don’t sell options with deltas below 5, it often makes sense to buy them back if you are short them.