I was a bit surprised that the discussion of credit vertical spreads in Jabbour's Options Trader's Handbook takes a grand total of one page, basically saying there are no viable adjustments. All you can do is close once the target profit or loss limit is reached. Really?
No adjustments for credit verticals?
- Thread starter Capt Hobbes
- Start date
Adjustment = slippage + commissions
Those overheads will eat you alive
Those overheads will eat you alive
Well, keeping a NET delta in check makes sense, not adjusting each day or week but at some point I adjust..
say call delta against put delta NET isn't what you want you can roll the call delta up and out if you want for example...
There are definitely some adjustments you can make, although as other posters have noted you need to be judicious about doing them as they can be commission intensive and you don't want to overadjust.
Several examples of adjustments:
* You sold a call spread. The underlying moved up past your short strike and is approaching your long strike. Your opinion on the underlying has changed such that you are now pretty bullish. You can buy back the short calls, and re-write them at above your long strike. You have changed your bear spread into a bull spread and saved on commissions by keeping the long leg in place.
* You bought a call spread. The underlying has moved up to your short strike, and you are sitting on a nice gain. However, you are pretty confident now that the stock is going to sit there until expiry (or at least for a while). You could keep your long spread on and now sell a short spread, using your current short strike again for the short leg. You now have a butterfly.
Charles Cottle's book Options Trading: The Hidden Reality goes into great depth on adjustments.
Several examples of adjustments:
* You sold a call spread. The underlying moved up past your short strike and is approaching your long strike. Your opinion on the underlying has changed such that you are now pretty bullish. You can buy back the short calls, and re-write them at above your long strike. You have changed your bear spread into a bull spread and saved on commissions by keeping the long leg in place.
* You bought a call spread. The underlying has moved up to your short strike, and you are sitting on a nice gain. However, you are pretty confident now that the stock is going to sit there until expiry (or at least for a while). You could keep your long spread on and now sell a short spread, using your current short strike again for the short leg. You now have a butterfly.
Charles Cottle's book Options Trading: The Hidden Reality goes into great depth on adjustments.
Yes, I'd love to find a broker who will let me adjust the entry time after I put on a trade.
Quote from Capt Hobbes:
Yes, I'd love to find a broker who will let me adjust the entry time after I put on a trade.
haha obviously thats not what i mean.. your selling the tails in this strategy.. so its best to do it in times when tails are overvalued.. and on indices.. this strategy doesn't work great as a contiguous roll type income strategy.. no matter what you have been advertised..
Thanks, yes, that makes sense. I don't have a rolling strategy in mind. What I'm looking for is how to see a timed position though, especially early in its life.
Here is what I mean. Suppose the underlying has just had an impressive sell-off or run-up and it's now at the point where I believe it has to at least slow down or pause for a couple weeks. Basically, I have a weak directional opinion. Also thanks to all the hype or fear, there's some good IV in those options which I expect should help. For example, we had a run from 20's into 40's on some good news and bounced off 48 once or twice. All the good news is now out, looks like some profit taking is going on and I expect it will consolidate for some time. So I'm considering a 52.50-55 bear call spread a month out.
Basically, I'm looking for a convincing plan for a credit vertical like this to deal with the large potential loss compared to the credit while giving the trade the room to move. Suppose I took .50 in credit and now looking at 2.00 maximum loss at expiration. I can imagine 2 basic styles:
1. Have a money management stop relative to the credit. Say, close once the loss is the same as the expected gain (1.00 debit in this example). The problem is the aggravation of being stopped out for a loss by a false breakout. Especially early on further from expiration when the P/L curve is flatter so the stop may be hit by a move that does not violate my directional opinion.
2. Size the position so even the worst outcome is acceptable relative to the account size, and just let it ride. Avoids the aggravation of losing to false breakouts, but produces smaller trades which can be a problem if the commissions have a per trade minimum. So we start losing more to commissions.
So, any words of wisdom on how to approach this beast? Is it simply choosing what makes me less unhappy--false breakouts or large commissions on small trades? Is there some smart middle ground, say moving the money management stop over time?