Adjust Option Trades when Profit Diminishes

Adjust Option TradesHow many times have you entered an options trade only to see that it immediately go against you? You have sold an option to receive option premium and want to keep it. Time is running out and you are wondering if you should make an adjustment but you aren’t sure how.

In fact, you aren’t sure whether you should make the adjustment because, what if things reverse and everything would have worked out anyway?

 Trade adjustments can be tricky. We don’t want to rush into a decision in our current state of panic. In fact, it’s actually better to have an adjustment plan ahead of time. The whole topic is complex enough that I decided to add a page to focus specifically on this.

There are actually several things to consider, among them are whether to adjust, when to adjust and how to adjust. I want to spend some time exploring each of these in a fair amount of detail.

Successful options trading is not about being correct most the time. When things go wrong, as they often do, you need the proper techniques to get your strategy back on the profit track.

Defence Is Just as Important as Offence. Repair strategies are an integral part of any trading plan. I always review a well thought-out set of “what-if” scenarios before putting any money at risk. Too often, though, beginner options traders give little thought to potential follow-up adjustments or possible repair strategies before establishing positions. Having a great strategy is important, but making a profit is highly correlated with how well losing trades are managed.

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When is an Option Position being tested

With selling naked options you hope that the position get profitable right away. But 50% of the time you will see that the position goes against you and that the position is being tested. What are the different scenarios when an option position get tested?

1 Short strikes becomes in the money

2 Breaches break even

3 Short option trades 2x sale price

When break even is reached it raises a red flag. When the price is 1.50 and you sold an option for 0.50 credit than we definitely have to take action.

 

Adjust Option Position when your Short Put is tested.

Many traders will sell a put only to find that they were wrong about the expected movement of the underlying stock. An out-of-the-money short put position, for example, would experience immediate unrealized losses should the stock drop. What should the trader do in this situation?

What enhancements can we make when a short put is being tested?

  1. Roll out to the next month
  2. Roll out and down for a credit
  3. Sell an OTM or ATM call
  4. Sell stock or futures
  5. Sell a call spread (Jade Lizard)
  6. Buy a cheap OTM put (which are not there any more)

Whatever option you choose it doesn’t feel fine. Because it goes against your original assumption. What is our preference: Roll out to the next month or roll down and out for even or a small credit.

 

What can we do if our short call is being tested?

  1. Sell and OTM call or ATM put
  2. Buy stock or futures
  3. Roll out to the next month
  4. Roll up and out for a credit
  5. Buy a higher strike cheap call
  6. Watch for binary or dividend events
  7. Maintain long bias portfolio
  8. Sell wide put spreads
  9. Cover portion of the trade

 

You can watch the video about this subject, click on the picture below.

adjusting trades

There are two ways to approach trades which are being tested. Some traders look at the delta. When this becomes to high they take action. We just look to the credit we received and if the trade loss is 2x bigger than the credit we received.

If you like this post you might also like these topics Adjusting Delta and Duration or adjust a strangle with options that are 16% ITM