Quote from optioncoach:
Or as Cottle would put it, would you enter into that adjusted position as a new position now looking at the market, and the answer was no.
Let me do one better. I am sure many people on this thread who havent read Cottle's books will find this helpful. A direct quote from his last book that i think is at the heart of the adjustment principle.
"To decide whether an adjustment is really something that traders
want to do, it is important to realize that they must like the current price
(alternative cost) of the adjusted spread. In other words, they should
look at the spread that they will end up with synthetically, and then
assess its value and their reason for putting it on. This is the point where
understanding the concept of synthetics separates the women from the girls. It is better to think about the most basic risk profile in the most
simple8 terms (i.e., synthetic terms) as opposed to the actual price terms.
At every stage in the analysis of the alternatives and adjustments to
a position, traders should ask whether they would put this spread on
having had no position whatsoever. They must make the decision based
upon the âfair costâ disregarding all the previous prices paid or received
(actual cost) on the aggregate spread. If the answer is that they âwould
not put on the tradeâ, then this particular adjustment is not right for them.
Their thinking should be consistent whether the position has just been
initiated or has already been on for some time. The trader should get out
of the position if the risk / reward profile is not attractive from this point
forward. Some of the most important revelations for traders occur when
they understand at what point they are contradicting themselves. This is
when the âlights go onâ and they really learn from their misperceptions." -Charles Cottle
Not sure if i am breaking any rules by posting this, so apologies in advance.
. The 1150s were going for a price that would have turned the the position into a no credit or no debit FLY. Since I did not expect the market to fall into the profit zone of the FLY, I took the 0.90 credit and got out.
