Option Strategy Adjustments

J

jwcapital

Time for a new thread. In my experience, adjustments rarely worked. If i simply exited the losing trade and admitted that my position was wrong, I would have saved a bundle.

Now, I see four ways to "adjust"--trying to fix a bad trade (worst option), getting out of a losing trade, adding more trades (laddering your trades instead of placing all-at-once), or constantly getting out of losing/winning trades and adding more (always in the market). As I have read, these seem to be the popular ways to adjust. I think that laddering and closing/winning trades and placing new ones make sense. I given this a great deal of thought. Suppose I want to place a JUN ES and/or option trade. I feel that the market will pullback/retrace and continue to proceed upward. So, on the first pullback, I place a covered call--with the call five points OTM. Let's suppose a couple of day's later, the market pullback 15 points from where I placed the first covered call. At this point a decision needs to be made, based on current greeks, directionality, etc. Either get out of the CC, add a CC at this level, hold up and place no new trades (fear the market will decline more), or consider a trade to follow the reversal (maybe selling two ES futures for a net short and shorting a put). If I stick to my original thesis, I would simply add another CC. Let the discussion begin.
 
Quote from jwcapital:

Time for a new thread. In my experience, adjustments rarely worked. If i simply exited the losing trade and admitted that my position was wrong, I would have saved a bundle.

If that is your track record, then who can argue with that. It clearly works for you.

But here's an important question: How skillful were you in selecting appropriate trades? Was it the adjustment that failed to produce good results?

Now, I see four ways to "adjust"--trying to fix a bad trade (worst option), getting out of a losing trade, adding more trades (laddering your trades instead of placing all-at-once), or constantly getting out of losing/winning trades and adding more (always in the market).

Let the discussion begin.
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To me adjusting is always two separate decisions:

1) Do I want to hold the current position? If no, close and that's that.

Open new positions if and when you find them

2) If I want to hold the current position and recognize that the risk of loss has increased to a point that's outside my comfort zone, I make an adjustment. That means <i>any</i> trade that reduces the risk of loss for my current position,

I don't just do something to get delta or vega or ?? into line. I must find something suitable. Something I believe is a good trade now.

I don't force an adjustment that's not a good trade on it's own merits. I'd rather exit the original trade and take the loss.

Thus I believe there are many possibilities when it comes to fixing an existing trade.

To each his own when it comes to adjusting. And I believe in adjusting positions I want to hold.

Mark
 
Quote from jwcapital:

Time for a new thread. In my experience, adjustments rarely worked. If i simply exited the losing trade and admitted that my position was wrong, I would have saved a bundle.
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I agree with this 100%. For me, there is no such thing as an "adjustment", just a new trade that should stand on its own merits.

I look at things from a gambling perspective. :eek: Adjustment means to me in gambling terms, the "chase". Chasing can be a very bad thing when gambling and can be a very bad thing in options trading IMO.

I don't try to make every trade a winner. I think the hardest thing for most is to accept a loss. Before I enter a trade (or wager) I ask myself, what is my expected % of wins and losses and what is the average net for each? As long as the # of winners returns more than your # of losers, then you will have a profit. You just need to determine if what you are doing returns more net for your wins than your losses. Of course this determination can be a tricky thing to find.

Joe.
 
I think one of the main issues that cause investors problems, when deciding whether to adjust or simply close it down,.... is the psychological aspect.
That being, some investors feel if they remain in the same stock and "adjust", then they are not experiecing a loss, since they are remaining in the same stock. The trade remains open.

Emotionally, they often don't accept that they could just as easily move that same remaining "unit of cash" to another stock, for the same or perhaps more premium.
But that would mean accepting a loss.
So they instead remain in the same deteriorating stock "adjusting".

Personally, given the choice, if I can earn a similar profit potential for the same "unit of time", moving my remaing cash to another stock, that would be my prederence, vs remaining in the same deteriorating stock adjusting.

However, a lot depends on the reason for the deterioration.
Is it stock specific?
Is it industry specific?
Is it the overall market?
Was it some external political news event?
Whether I get out, or stay and adjust, really depends on the reason for the deterioration, and over what period of time, and where is the stock trading relative to its downside tech support, ect...

But for many who remain and adjust, its that darn emotional aspect that prevents them from accepting the loss and moving on. They really feel its not an actual loss, if they remain in the same stock and adjust.
They don't accept or realize they may be able to earn the same premium in a different stock, over a similar unit of time.

Put Master
 
I have mixed feelings about adjustments (versus just bailing) myself, and I'm wondering what others think about whether the type of trade one is in governs the advisability of adjustments.

Mark, I know you like to trade condors. I prefer the wide flys. I think of these condors, for example, as having more 'leverage' than ATM butterflies. I'm not sure whether leverage is the right word or not. But having OTM options seems to confer less stability when the underlying starts moving around, since one does not collect a lot for the short options. I'm not sure which Greek explains this, or if it's a combination of Greeks. Probably someone else can explain this better than I can.

Am I thinking about this right? Is it more advisable/important to adjust a condor than an ATM fly?
 
Quote from drcha:
I'm wondering what others think about whether the type of trade one is in governs the advisability of adjustments.

Mark, I know you like to trade condors. I prefer the wide flys. I think of these condors, for example, as having more 'leverage' than ATM butterflies. I'm not sure whether leverage is the right word or not. But having OTM options seems to confer less stability when the underlying starts moving around, since one does not collect a lot for the short options. I'm not sure which Greek explains this, or if it's a combination of Greeks. Probably someone else can explain this better than I can.

Am I thinking about this right? Is it more advisable/important to adjust a condor than an ATM fly?
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Hello doctor,

1) I do believe that the nature of the position dictates the adjustment. A naked short requires serious attention, whereas a spread purchased for 20 cents requires little.

2) Flys are foreign to me, the only flys I use are to buy cheap FOTM flies and sell, if and when they become ATM flys.

Have you considered looking at your positions differently? You can do that by thinking of a 100-point butterfly as 10 consecutive 10-point flys, or five 20-point flys.

Again, lacking experience, I'm not sure how to handle this, but it seems right to me to unload each 10-point fly as it becomes ATM. Then, if the underlying moves out of range, you are unhurt as you collected premium all along the move.

If underlying reverts back to the center, well then you make less than you could have.

Anyway, just a thought from a non-fly trader.

3) I do collect 'a lot' for the OTM options I sell and am not sure why you believe most iron condor traders sell cheap options and buy even cheaper options.

To me, the risk in iron condors comes from negative gamma - which in turns causes a big change in the position's delta.

Mark
 
Seems some of us agree that a particular adjustment (trying to repair a losing trade) is the worst option. If I understand correctly, Mark has been successful repairing losing trades. Someone mentioned low premiums when referring to iron condors. I do agree with this--mostly because of the bear call spread. If the short legs are equidistant from the underlying price, the short put premium is considerably greater than the short call premium. As I mentioned in a previous thread, I need higher premiums, for I trade for a living. So, I am looking at shorts closer to the underlying. Now, if one tries to look for shorts puts and calls with equal premiums, the distance from the underlying to the short call is much smaller than the distance to the short put. In any case, I have made money trading IC's two ways: I ladder my entries and I exit legs once they lose 80-90% of their value. These are my "adjustments." As far as short straddles/iron butterflies, they work too, but with a lower VIX. The total premium of the ATM shorts is usually much less than the distance from the underlying to the OTM shorts for a strangle/iron condor. I personally derive more comfort from the strangle/IC because of this phenomenon. Don't get me wrong. I have made money with short straddles and IB's, but I have used them at lower VIX's. Right now, we do not have a typical market; there really have been NO pullbacks. Therefore, I think that a "market-neutral" strategy doesn't produce as much profit {if any} than a bull put spread, covered call, bull call spread, etc. That is why I prefer to take a
 
>> In my experience, adjustments rarely worked. If i simply exited the losing trade and admitted that my position was wrong, I would have saved a bundle. <<

If your experience had been that adjustments worked most of the time for you, your post would have been the exact opposite of what you wrote.

We each have different objectives, tolerances, strengths, judgement and abilities. What works for one doesn't always work for another.

There have been times when getting out was the best thing that I could have done but didn't. And there have been times where I adjusted and it saved my asp. It really depends on the circumstances.
 
In my experience adjustments work fine if they are part of the original trade plan e.g. open a single calendar -> market moves -> turn into double calendar

The ones that I have found not to work are the ones where people sit on their hands and pray, then adjust when the position becomes too painful
 
Quote from Pinozi:

In my experience adjustments work fine if they are part of the original trade plan e.g. open a single calendar -> market moves -> turn into double calendar

The ones that I have found not to work are the ones where people sit on their hands and pray, then adjust when the position becomes too painful
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