Trade management: adjustments

BlueWaterSailor

BlueWaterSailor

In reading over the threads here, and having seen it elsewhere, I've become very interested in the subject of trade adjustments. Some people seem to be absolute virtuosos with them - an iron fly bought here, a condor sold there, and - voila! - the 16-legged Lovecraftian monster of a strategy that was miles deep ITM has been perfectly tamed and recentered, at some humongous credit to boot. Meanwhile, I'm still at the crayon-plus-construction-paper stage: "so... the long goes like this, and the short goes like that..." - all while $Spot continues to run.

Seriously, though: I'm comfortable doing basic rolling with singles, spreads, and ICs; up, down, in, or out, earlier vs. later - I've got those mechanics down. But what I really want is the perspective and the skill set that lets me look at a trade going south and think "right, this needs an IF centered on this strike - or, let's see, selling 35 shares of SPY would work even better than that!" Unfortunately, I don't even know how to get started on acquiring either of those.

In short, I'm missing either some fundamental chunk of knowledge or a set of relevant techniques - or, most likely, both. Google seems unable to find any sort of a relevant grimoire, and all the traders I know are at about the same level of skill as I am.

Any and all help, clues, pointers, or useful ideas would be greatly appreciated.
 
I think some of the magic is that these guys are using straddles, strangles, and synthetic futures and so they have to use these (very sophisticated) adjustment techniques. I really prefer using equity index futures since you can spread them inter-market to tailor exposures instead of all this stuff (capital efficient as well).
 
@BlueWaterSailor , I found the Option Alpha videos very good. Eg.

etc

The basic principle for me, is to adjust when I see that my trade is heading towards a loss, and I do it to reduce my eventual loss, or eliminate it as much as possible. One pitfall to watch out for is to ensure that you do NOT increase your max possible loss after adjustment, by taking on a bigger risk. In fact, it should be the opposite - either the probability of that max loss, or the size of that max loss should be less than it was before the adjustment.

I've found that adjustment strategies vary depending on (amongst other things) :
- type of trade. Different trades require different techniques - short calls, for example, are easier to adjust than say call credit spreads. Even multi-leg butterflies have a ton of adjustment choices.
- time left to expiry. Hard to adjust if there's only a few days left till expiry, so it's better to be prepared ahead in time.
- the price of the underlying in relation to the options strike (I've had some naked short calls which were WAY ITM - very difficult to adjust these, but short calls that are just ATM are easy enough to roll forward or convert into strangles etc)
- Greeks at the time (esp. vega)

Sometimes the best adjustment is simply to accept that the initial trade didn't work as planned, and to put the emotional pain aside and accept a small loss. Then to update the trading diary with lessons learnt and move onto the next one.

Good luck.
 
Real Money said:
I think some of the magic is that these guys are using straddles, strangles, and synthetic futures and so they have to use these (very sophisticated) adjustment techniques. I really prefer using equity index futures since you can spread them inter-market to tailor exposures instead of all this stuff (capital efficient as well).
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I just recently started learning about futures; no practical experience with them, though. My current experience is about 90% options/10% stock, but I want to get thoroughly familiar with all the different asset classes as time goes on.

I actually don't see the techniques that I'm discussing as being very sophisticated; the thing I'm interested in is the thought process that goes into figuring out what needs to be done when a trade goes awry. Right now, I have a narrow set of fairly simple responses, and I'd like to broaden the range; if at all possible, I'd like to get at the core principles behind the process, because that's what works best for me when I learn something.
 
ffs1001 said:
@BlueWaterSailor , I found the Option Alpha videos very good.
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I went through those when I got started in options, as well as all the relevant material at TastyWorks. I agree, they're quite good - especially if you're not at all familiar with adjustments. What I'm looking for is a bit outside that scope; e.g., there's a video on TW where Mike Butler mentions adjusting an IC in SPX, and runs through the results of having added a couple of flies to it:

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I would love to know how to figure out that kind of thing. Why flies? Why at those strikes? How do you adjust strats other than the IC that way? What's the thought process behind it?

ffs1001 said:
The basic principle for me, is to adjust when I see that my trade is heading towards a loss, and I do it to reduce my eventual loss, or eliminate it as much as possible. One pitfall to watch out for is to ensure that you do NOT increase your max possible loss after adjustment, by taking on a bigger risk. In fact, it should be the opposite - either the probability of that max loss, or the size of that max loss should be less than it was before the adjustment.

I've found that adjustment strategies vary depending on (amongst other things) :
- type of trade. Different trades require different techniques - short calls, for example, are easier to adjust than say call credit spreads. Even multi-leg butterflies have a ton of adjustment choices.
- time left to expiry. Hard to adjust if there's only a few days left till expiry, so it's better to be prepared ahead in time.
- the price of the underlying in relation to the options strike (I've had some naked short calls which were WAY ITM - very difficult to adjust these, but short calls that are just ATM are easy enough to roll forward or convert into strangles etc)
- Greeks at the time (esp. vega)

Sometimes the best adjustment is simply to accept that the initial trade didn't work as planned, and to put the emotional pain aside and accept a small loss. Then to update the trading diary with lessons learnt and move onto the next one.

Good luck.
More...

Thank you; I appreciate that - as I'm sure other readers will as well; it's a great summary of the basics all in one place, which would have been fantastic to have when I was getting started (again, this speaks to how I learn best: if I'd started with this, and then got to dive into more detail like the above videos, it would have cut my learning curve by 3/4. As it was, assembling everything took... a while.) I agree with all of the above, and would also add that when to roll is, to me, the most critical factor in the process. Part art, part science...

Thanks for your response.
 
BlueWaterSailor said:
I went through those when I got started in options, as well as all the relevant material at TastyWorks. I agree, they're quite good - especially if you're not at all familiar with adjustments.
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I believe one of tenants OptionsAlpha teaches is to only adjust the profitatable leg - never the loosing one. Isn't it increasing your risk in a losing trade? Kind of like averaging down? What do you guys think about this particular rule?
 
qlai said:
I believe one of tenants OptionsAlpha teaches is to only adjust the profitatable leg - never the loosing one. Isn't it increasing your risk in a losing trade? Kind of like averaging down? What do you guys think about this particular rule?
More...

I can't think of any adjustment that doesn't increase your risk once you're in a losing trade (other than simply taking a loss - I suppose you could look at that as reducing exposure...) IME, moving the tested side locks in your loss, since it would be done at a debit; rolling the opposite side increases your time/exposure risk and the risk for the narrower spread, but at least you get a credit for it. Obviously, that exchange doesn't come free: your overall risk increases somewhat (depending on current volatility), which is why you change your outcome goals - now, rather than looking for a high percentage of profit, your expectation should change to a small profit or a scratch. But I see that as a much better outcome than simply taking the loss on every challenged trade.

I will note that, once I got the rolling mechanics down, my average P&L and portfolio volatility improved sharply. Screwing up rolls - especially by not keeping track of the actual P&L - is not conducive to keeping your money (and I still remember every one of those - ouch.) Looking back, I'm amazed that I managed to stay above water back then.
 
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