- 1 OPTION ADJUSTMENT – ADJUSTING A LOSING POSITION CHECKLIST
OPTION ADJUSTMENT – ADJUSTING A LOSING POSITION CHECKLIST
So many time I have entered a Trade and immediately the trade goes against me.
Really wonder should I adjust the Trade.
The most pertinent question that comes to the mind.
What if I adjust and the trade reverses?
Your adjust can even go wrong if you rush to adjust your trade. Nevertheless having an adjustment plan ahead of time is the most important aspect of options trading.
OPTION ADJUSTMENT CHECKLIST
Few important things one should check before option adjustment.
The options strategy is usually initiated with 60 Days to Expiry to 90 Days to Expiry. Now if the strategy goes wrong immediately within few days of option strategy initiation then ample time is remaining for option strategy adjustment.
Perhaps at times, the strategy goes wrong at the fag end of the days to expiration. In such cases the time to expiration is very short there is not much room left for options adjustment. It is very important to ensure that post the options strategy adjustment there is enough time for the option adjustment to reflect. If the option strategy adjustment is done in a very short period of time other option greek risk would appear.
Especially during the last few days of the option expiry, the gamma risk is very high for net short option portfolio. Since this post is not about the gamma risk. The gamma risk would be elaborated in another article. Remember in last few days of expiry option adjustment is not advisable.
OPTION DIRECTION PREDICTION
Option strategy selection is usually decided based on three possible outcomes of the underlying. Bullish, Bearish or Neutral. For Neutral option strategy, this direction prediction does not play an important role. Now for bullish and bearish option strategies, it is very important to recheck the premises on which the stock trade has been entered.
If the direction is maintained even after the trade going in the wrong direction then option adjustment would be a very good option. In any case, if the direction predicted does not maintain the option strategy gone wrong. Then it would be advisable not to pursue the option strategy.
ADJUSTMENT BASED ON GREEK
Option Greek are a fantastic tool for you to understand how your option strategy is performing and more importantly it guides the options trader for selecting the right adjustment.
Now adjusting an options strategy gone wrong with Option Greek is a basic permutation and combination of Theta, Vega and Delta adjustments for creating a profitable outcome. Based on one’s prediction and comparing the same with payoff chart with the various combination of option Greek gives an idea of possible option adjustment available.
NEGATING RISK WITH ADJUSTMENT
An option is a great tool for hedging. But when the option position are taken which are not hedged then they lead to unexpected risks. First and foremost point of the checklist should be that additional option position should not increase your risk.
Increasing the risk with option adjustment is no good to you. Plan all possible outcomes and analyze all possible payoff chart to understand where you stand post adjustment. Pre-planning your adjustment and doing the right risk adjustment is very important. If it is not pre-planned then in
UNDERSTANDING VOLATILITY ENVIRONMENT
Implied Volatility of the underlying is very important in doing trade adjustments. Implied Volatility will enable you to predict how much movement is possible in the underlying. Current implied volatility compared to historical implied volatility will give you an idea if the implied volatility is going to rise or fall.
Implied volatility is important when directionless strategies are applied. The rise in the implied volatility would lead to falling in the price and rise in the premium. And fall in the implied volatility would lead to rising in the price and fall in the premium.
Strangle or Straddle or any other nondirectional strategy you choose the main parameter for monitoring this strategy is volatility.
IS CHANGE OF STRATEGY POSSIBLE
Changing the direction of the entire option strategy with adjustment to lock the loss and limit the risk to cover the loss and also earn your losing position. For example, a naked call or put the direction can be changed by making it a spread. Now the direction of the strategy has changed also the risk has been limited with a spread. Likewise, a straddle can be converted to a calendar straddle.
Adjustment in Option Strategy varies from strategy to strategy. Most of the time lapses in option strategy selection checklist lead to a situation where option adjustment is required.
Occasionally statistical loss needs option strategy adjustment too.
The concept of entering a position in a staggered manner at a time is very helpful to adjust your position. Entering a strategy with 90DTE or 60DTE with an interval of every 7 days. Or as the course of the strategy is.
One of the most beneficial and hardest concept to understand is option strategy adjustment.
I am really interested to know which is the strategy which you find the hardest to adjust when gone wrong.
In my coming posts will put emphasis on each option strategy and how each strategy should be adjusted on different circumstance and outcomes.
Are you planning to start adjusting your losing positions? Have you already started? Do share your experience in adjusting your option trade.I look forward to your comment.