Fixing My Broken Bearish Trade (Buy PUT on SMH)

My trades since restarting my portfolio in April 25 have been doing quite well. I managed to grow my portfolio from USD45k to USD55k without adding any capital. However, there is a trade that has not been doing well and has lost much of its value. It is a BUY PUT contract on SMH, an ETF basket of semiconductor stocks, that I bought when the stock was about to bottom out. The expiration date was 16 Jan 26 and the strike price was USD 170.

SMH went on to achieve a 53% return from April to Aug as investors’ capital flooded into semiconductor stocks amid the AI craze. As the PUT contract value dropped, I averaged down a number of times (when SMH was trading at 191.37, 245, 242.3, 259, 275.05, 284.2), hoping for a significant correction so that I could exit the trade and cut my losses. I ended with 8 BUY PUT contracts with an average price of USD 462 per contract. However, the market value was only USD 88 per contract, which meant an 81% loss of capital.

My biggest concern was that these contracts would eventually run out of time and decay rapidly as the expiration date neared. If a major correction were to happen in October/ November, it would not have salvaged much, as the time value in the contract would have dropped drastically, with only a couple of months left to expiration.

How I Fix This Trade?

I turned it from 8 x PUT contracts into 2 x BULL PUT spread contracts with strike prices USD 190 and USD 210, and the new expiration date is 17 December 27, more than 2 years from now.

For this new contract, I sold the USD190 PUT and bought the USD210 PUT. The premium to buy these BEAR PUT spreads came from the capital released by closing the PUT contracts that I had on SMH.

The max gain for this trade happened when SMH closed below USD190 on expiration date (17 Dec 27) and I would have redeemed USD4,000 worth of returns, which would be higher than my initial capital of USD3,813, so I not only broke even but also earned a small profit.

Further read: How Does Bear PUT Spread Work?

Why I Choose This Strategy?

I used this repair strategy to extend the expiration date by almost 2 years (Jan 26 ==> Dec 27). Anything can happen during these 2 years, and a big market crash would increase the contract value significantly so I can reduce my losses or even break even if SMH crashed more than 50% at any point in these 2 years.

If the worst-case scenario happened and SMH did not crash, I would have lost the USD3.8k worth of capital at the expiration date, 2 years later. I think by then, I would have earned enough profits (hopefully) so that this loss would not be significant. If I were to cut losses now, it would have reduced my profit (over the past few months) by more than 30%. That would be quite demoralising, considering that I had to give up a good portion of my gains since April 25.

Concluding Thoughts

By using this repair strategy, I significantly increased the contract time frame as well as raised the strike price(s). It is also a hedge against any potential market crash that might happen in the next 2 years. If I had not fixed the trade and SMH share price stayed sideways over the next few months, I would have lost my capital as the PUT contracts eventually expire worthless in Jan 26.

I feel more relieved psychologically as I have more time now. I have waited patiently over the past 4 months for SMH’s share price to correct, and every time it felt like it was going to crash, it somewhat rebounded, and the hopes of exiting the trade with less losses faded away. With a longer time frame, hopefully I can find a suitable time to exit with minimal loss.

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