What to do with Emini Options?

Question

I sold two ES Puts with strike of 1150 on Thurs and on Fri the S&P 500 took a steep dive.

Any advice on what I should do with the Puts? Should I wait it out and hope it will expire worthless or there's a chance the market will go down further?

Thanks!

Answer 1

Get out.  NOW!!!!!!!

If "hope" is part of your strategy you are going to be eaten alive and you have no business trading.

Never trade against the trend.

You don't even mention the most important piece of information in your question: the expiration.

Answer 2

<<<Any advice on what I should do with the Puts?>>>

Without knowing your risk profile or your skill level it is difficult to give good advice.

The only time I sell naked puts is when I am trying to buy the underlying at a discounted price. If you want to buy the Emini futures, you don't need to do anything.

If you don't want to buy the Emini you can hedge your delta risk with a bearish vertical spread, but that will created a three leged spread that may well need to be adjusted again prior to expiratioin. If you are not familiar with adjusting spreads that may not not be a good choice.

Simply closing your position and taking a loss, as suggested in the first answer, is a viable choice if you do not think you know how to manage the position. In that case it is better to just take your loss and spend some time learning more about options before attempting another trade. I hope you understand that your loss Friday was due not only to the change in the S&P 500 price, but also due to the increase in the implied volatility of the options. VIX was up over 26% Friday.

http://finance.yahoo.com/q?s=%5Evix

<<<Should I wait it out and hope it will expire worthless or there's a chance the market will go down further?>>>

Of course there is a chance the market will go down further. It is also quite possible implied volatility will increase further. Either of those events will increase your loss.

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It is important to learn from your trades. Some of things I believe you should learn from this trade include:

(1) Before you open a trade, have a plan about how you will handle the position in the future in any market.

(2) Learn how to use implied volatility in your trading. You rarely, if ever, want to open a position with a negative vega when implied volatility is low.

(3) Do not sell naked position unless you want to be assigned and you have adequate funds to handle assignment.