Trade Details & Summary

COF Strangle (LIVE Adjusting Trade)

Looking to learn how to adjust an option trade like a short strangle? In today's video I recorded my live trading screen (and real money account) showing you the entire thought process we used to make an adjustment to my position.


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In this video, we're going to look at making an adjustment to our short strangle in COF which is Capital One Financial. It's about 11:30 when I'm doing this video here on the East Coast. The market is opened, stocks moving a little bit higher today, and what we want to do is we want to make an adjustment to our COF strangle that we had.

You'll notice here we entered this short strangle in COF a little while ago. It's got about 25 days to go till expiration, so we're still almost a month out from expiration. We don't want to make an adjustment too aggressive, but it's moving against us a little bit, and we can we do something to take advantage of that right now.

We initially sold only the 67 1/2 calls and the 52 1/2 puts. And what you'll notice is that the stock is trading up around 67.23 right now. And again, you'll see this number is changing because we're live-time right here in a real trading account.

What we want to do is we want to take advantage of the fact that the stock has moved higher towards our 67 1/2 calls and that the value of our 52 1/2 puts has decayed. You'll notice that our trade price on the 52 1/2 puts was $58, now they're trading for $16, so they've lost a considerable amount of their value because the stock has rallied higher.

Actually, on those short puts, we made $42. One of the techniques that you can use for adjusting a short strangle like this - Here's our short strangle here in Capital One. And you can see that our short premium trade is here and then our short call trade is up here, and our short put trade is up here, and the stock is trading right here, this dotted blue line in the middle of the screen.

One of the adjustment techniques that you can do here is you can roll up and roll closer your short put option. We already have the 52 1/2 short puts. Those have decayed in value, and we can close out of that trade, close that trade, the bank that little $42 profit and roll up to something much closer to where the stock is trading, maybe $60 or so.

We'll go in here and look at it here in a second. But we want to roll that closer to taking in a higher net premium. And by doing that, what that's going to do is it's going to take our breakeven point on this particular stock, and it's going to move our breakeven point from where it is here which is around 70 or so and move that breakeven point out further.

I don't know if it'll go past 70, but it'll move that breakeven point out further. And we're just basically taking what the market gives us. Now, notice we're adjusting our short call side. We don't want to move that short call side or roll it up higher because what if the stock continues just to move higher?

Then we're just going to compound losses to the top side. We're going to take what the market gives us and keep rolling up this put side closer and closer. Once we go actually into the trade tab here inside Thinkorswim, we're already into the March contracts, and you can see that these put options that we have down here at 52 1/2 have a 5% chance of being in the money right now.

And that's why there's not too many people trading right now because they're not worth a lot and there's probably a low chance that it gets all the way down to 52 1/2. What we want to do is we want to come in closer and roll up to something a little closer. Now, in this case, you'll notice that really, there's only a couple of choices.

You can only really do like the 62 1/2 puts or the 60 puts because that's the only place that people are trading right now. Now, this is where you start just to look inside of your platform and your broker trade tab and just do a little bit of smart thinking here and realize, "Hey listen; nobody right now is trading in these contracts. There's no volume, no open interest. There's no market for these contracts."

And you'll usually find that it's at these bigger strike prices anyway, so 60, 62 1/2, 65, etc. In this case, what we want to do is we want to sell the 60 put options which are here. That's what we talked about doing before, so we'll just go ahead and left-click on those and sell those 60 put options.

That will give us a $43 credit for those options, but remember, we have to close out of our short 52 1/2 puts, so we're going to go ahead and buy those back. Now, the difference in mid-price between selling the 60s and buying back the 52 1/2 is that we're going to take a net additional credit of $30.

This credit is going to help reduce our risk a little bit, and it's going to take advantage of the fact that we are banking a little bit of our profit on those 52 1/2 puts. With that additional $30 credit, we can take our original credit, our initial trade price of 148, we add that $30 credit, and we're now looking at a total credit right now after adjustments of 178.

That 178 is what's going to help move our breakeven point just that much further beyond where the stock is trading right now, where our breakeven point is right now. Inside of here, we can do this just by right-clicking on this and hit confirm and send in the analyze tab.

We're going to let this thing go into the market and start working here and see if it can get filled, and then you'll see that adjustment come through here. That's the way that we're going to adjust this trade for Capital One. Again, we don't want to be too aggressive in our adjustments because we still have a lot of time here in the expiration cycle.

We can go all the way out until March. All we're doing is we're just moving up to the short 60 put strike here, so notice that we still leave a lot of room for the stock mainly to fall $7 between now and expiration. And it can happen. The stock can move between now and expiration.

And since we have 25 days to go, we're not going to be too aggressive in our adjustment technique. We'll pause this video. This order is working in here. You can see that this Capital One order is working here with another one that we already have in here. And we'll come back here and take a look at this once it's filled.

Alright, it's a couple of minutes after we entered that order in COF to make that adjustment to our strangle. And you can see that order did get filled at the $30 credit that we were targeting. And now, inside of our position statement, you can see that now the order is split.

We have now our 67 1/2 calls, we still had, and you could see that naturally, it closed out of the 52 1/2 puts, so we're totally out of the 52 1/2 puts, but now we're back into the 60 puts that we now adjusted into. This is the new resulting position. We'll manage this one appropriately.

But hopefully, that's a excellent walk-through of how we went about making an adjustment or hedge to our short strangle in COF. As always, if you guys have any comments or questions, please add them right below. And until next time, happy trading!

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