Let’s talk about options adjustments. That mythical term that new options traders hear all about but are never actually made privy to. Well, take heart, I was right there not so long ago. I searched aimlessly for someone sharing their strategy on options adjustments but all I found were countless “gurus” claiming that to be consistently profitable you have to make proper options adjustments. Followed with…so buy this course…and so on…
That was tiring and frustrating to say the least but what I eventually learned was, that “holy grail”, just didn’t exist and never would. But why?
To make it as cut and dry as possible, because it couldn’t exist. The options are to numerous for it to ever be able to exist. At least not in the direct manner an aspiring options trader would need to gain any benefit. This is due in whole to the fact that each option strategy is unique and the market is unique at every new second of the trading day, week, month, etc.. To elaborate, let’s paint a picture in the form of an example and elaborate moving forward.
A not so typically untypical scenario? What?
Suppose I placed a trade on Apple to move higher over the next 3 months. Say a vertical put spread aka a Bull put spread. However, shortly after entry Apple began a correction phase and I’m now staring down the barrel of a sizeable loss. Obviously, I would like to find a way to recoup some of those losses, if not turn the position completely around. But how is this possible?
For those of us that got our start trading stocks, we’ve been hard wired to accept that losses are just that and there is nothing we can do. We’re taught to remain patient and wait for things to turn around. However, with options always marching toward the inevitable expiration date, time is almost never on our side. We must act and typically very quickly to overcome said losses.
Now suppose I decided I’m ready to make the necessary adjustments and put this trade back on track. To do this, I must first think about and then decide what I believe the stock will do next. I have to do my research on Apple. Is there something fundamentally different about the company today that I wasn’t aware of when I opened the position? Does technical analysis point to one direction or another? Is there some news event pushing price down? Or is this just a common retracement before continuing the move higher? While this isn’t an exhaustive list it should highlight that to make a sound adjustment I’ll need to prepare as if I’m starting from the beginning. Because indeed that’s what I’m doing. I have to make the decision about whether my outlook on Apple has changed.
Once completed this example could be carried out in a multitude of ways. For simplicity sake, let’s assume I decided Apple would continue higher in the coming weeks. I’ll briefly touch on what could be done should my outlook have changed in just a bit. With my assumption that Apple will move higher, the logical first question is, “should I do anything?” or should I just wait for this to rebound. That of course is assuming I have enough time until expiration for a favorable move to occur. If not, then an adjustment would likely be the correct path. (This isn’t to say that if I did have enough time an adjustment wouldn’t also be the correct play)
Now I have to choose which adjustment makes sense. In order to do this I’ll have to use prior knowledge of different options strategies to reconstruct my current position. Typically, creating an entirely new position either using the existing position or closing it in favor of a potentially more lucrative one.
The easiest solution to this proposed dilemma would be to just buy a long call option but this just costs more money. I could roll out in time my bull put spread but that may just lock in my losses, depending on how steep they are once I’ve finally decided to adjust. I could create an iron condor but again, that could lock in my loss or amplify it if this trade continues to far in either direction. And the list goes on and on…
The point I’m trying to make is each adjustment requires some serious critical thinking. Those thought processes lead to decisions that must be made based off of the market at that moment. Theoretically, one could just adjust their position perpetually until eventually the position became profitable but I don’t want to dive into that rabbit hole. So I could never find the holy grail of options adjustments because any advice could be the exact wrong advice at the exact right time.
**my head is spinning**
Quickly…suppose my new outlook had me bearish on Apple. How bearish? Do I think the position will continue substantially lower or maybe just marginally lower. If only marginal, the proper play may be to make no move at all or simply roll to a new expiration month and gain some more time for my trade to actually work. I could also deconstruct the current position and turn it into a bear put spread or simply buy a long put option. I could also create a strangle, a straddle, a diagonal spread, a calendar spread, etc. etc.
The point is there are so many options adjustments that could be made the only way to truly know what adjustment is the proper one is to look at where you are and where you need to be, then rebuild or “adjust” the trade to meet those requirements.
I hope this helps in some way but feel free to ask questions in the comments below.
May God bless and keep your trading profitable,
Jeff the “OptionBoxer”