Adjustment

T

tonylim

I am new to Options Trading (about 6 months old, 3 months in demo, 3 months in live). I am mainly sell credit spread (vertical spread). Could be a put or call or both (iron condor) on Equity Index.

I am looking for guide/solution on adjustment. How do you do adjustment when your position is going against you, but not yet hitting your short Strike?

I read from one book ("The Option Trader Handbook: Strategies and Trade Adjustments") that say for credit spread "there are no viable adjustments that can be made to your position without significantly increasing your risk or wiping out the net credit received. Is that so?

Does that mean my only Stop Loss management is the maximum loss between the Strike minus the credit received? That risk/reward ratio is simply too bad for credit spread selling.
 
Quote from tonylim:
----new to Options Trading....
----mainly sell credit spread (vertical spread).
----adjustment when your position is going against you....
----Option Trader Handbook....
----no viable adjustments....
----increasing your risk....
----wiping out the net credit received.
----Strike minus the credit received?
----risk/reward ratio is simply too bad for credit spread selling.
More...
1) If you "adjust", you can incur more fees, slippage and aggravation. :(
2) If you're good with forecasting price direction, you should be trading outrights or debit-spreads instead. :cool:
3) As a rookie, you might be improperly viewing the "credit" as "free money" merely because it is out-of-the-money. :eek:
4) To trade credit spreads can be difficult because you have to wait "too long" to get a relatively "small" credit. The market has more time to "ruin" your trade. :mad:
 
Cover and take the loss. You were wrong, get out and trade another day. You will always be adjusting at edge-loss. Why add risk. And don't try to revenge-trade when it bounces back.
 
Quote from nazzdack:

1) If you "adjust", you can incur more fees, slippage and aggravation. :(
2) If you're good with forecasting price direction, you should be trading outrights or debit-spreads instead. :cool:
3) As a rookie, you might be improperly viewing the "credit" as "free money" merely because it is out-of-the-money. :eek:
4) To trade credit spreads can be difficult because you have to wait "too long" to get a relatively "small" credit. The market has more time to "ruin" your trade. :mad:
More...

1) agreed
2) not so good about price direction. But using support and resistance, can predict where it will not go.
3) I am trying to take advantage of time decay
4) my time to expiration is within 1 month. It is far out of money. So far, it has not hit the strike. But there was once it is too close to strike that make uncomfortable.
 
Quote from Doobs789:

Cover and take the loss. You were wrong, get out and trade another day. You will always be adjusting at edge-loss. Why add risk. And don't try to revenge-trade when it bounces back.
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Say, my take is he price will hit my strike as I believe there is a strong support above it. When price came down fast approaching the strike, I will have unrealized loss. Since it has not hit the support or the strike, my view on the market is still considered not wrong. Didn't want to get out and take the loss. But when the market hit pass the support or strike, it could be too late to get out as the loss will be quite huge.
 
Quote from tonylim:


"there are no viable adjustments that can be made to your position without significantly increasing your risk or wiping out the net credit received. Is that so?

Yes. It is exactly so.
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I think the Tasty Trade method is pretty good in the current market environment.

1) Adjust winners not loses - for losers use time and roll forward
2) Lots of small trades
3) Take profits (close) winners on 50-75% of max possible profit
4) Look for high IV options or at least high IV within a stock's typical
IV range.
5) Aggresively roll winners toward the market.

The Jade Lizard idea has been working in the current market. Combine a naked
under the market put (far?) with a debit call spread above the market so there is no
upside risk (combined naked put and debit bear call spread wider than the spread
distance). This makes use of normal skew where puts have higher IV than calls.
Agressively roll the puts up on stock price rise. Small because expect some losses
that maybe can be rolled forward. Reverse Jade Lizards have worked great in TWTR
recently because skew has been toward calls.
 
Quote from tonylim:

I read from one book ("The Option Trader Handbook: Strategies and Trade Adjustments") that say for credit spread "there are no viable adjustments that can be made to your position without significantly increasing your risk or wiping out the net credit received. Is that so?
More...

One option on a simple credit spread is....IF...you have enough time in the spread to have a bit of a credit you can roll it to the next month to give it a bit more time to be right (as long as you can roll for a credit and not a debt) a roll is OK. Iron Condors tend to be more difficult to attempt any adjustment as they will become very commission intensive and hard to roll the IC in total for a credit. Your credit spreads should not be risking too much to begin with..5 pt wide on indicies with just one or two contracts until you are comfortable and have experience in both high and low vols.

Selling credit spreads in a very low vol environment are just not that great..works better in higher vols as already mentioned.
GL
 
Thanks for all the valuable replies.

My next question on Adjustment is: WHEN do you adjust?

My Short Strike is always far OTM around support/resistance. For Put Spread example, it will be below the support. So, if price didn't fall below the support and my Short Strike, even with unrealized loss, can I say that my trade is not wrong? Thus, no need to adjust.

But if it ever hit below the support (even if it is still slightly above my Short Strike), the trade could be 'wrong'. Do I adjust now? The loss will be even bigger. Is it too late to adjust?

Worst, if it ever hit below my Short Strike, making it ITM. Is it too late to adjust?

WHEN is the right time to adjust?
 
Quote from tonylim:

For Put Spread example, it will be below the support. So, if price didn't fall below the support and my Short Strike, even with unrealized loss, can I say that my trade is not wrong? Thus, no need to adjust.

But if it ever hit below the support ...
Worst, if it ever hit below my Short Strike, making it ITM. Is it too late to adjust?

WHEN is the right time to adjust?
More...

Cover the long option on a touch of your short strike and sell some calls to get delta neutral. Double up like a man, man.:p

...or be reasonable and try to cover for a modest loss rather than the full boat below the long strike at expiry, but that's just boring.
 
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