Trade Details & Summary

IYR Call Credit Spread (LIVE Adjusting Trade)

Want to learn how to adjust a call credit spread option strategy that is moving against you? This adjustment is good for 2 reasons. First, it reduces the overall risk in the trade if IYR continues to move higher. Second, it still leaves room for the stock to fall back down and into our new iron condor profit window.


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  • Jeff Smock

    Do you have a video for opening a live credit spread? I’ve been looking for an example this past week in the market. The right pricing on the 2nd strike has been elusive ie credit does not equal leg between strikes x probability. However, the trades have good vol

  • Yep indeed – just kept rolling put spread higher.

Show Video Transcript +

In this video update, we're going to look at adjusting a call credit spread we have in IYR. Markets just opened about 30 minutes ago here on the East Coast. All of this is live real-time. You can see the markets are moving, real account, real money, no paper stuff.

In IYR, we had originally sold the 70, 72 call spread above the market. And you can see that the stock is trading between our strike prices now. And we still have about 22 days to go until expiration, so we don't want to make an adjustment that pins us into a very small range because there's still a lot of time between now and March expiration.

We want to make an adjustment that reduces risk first because that's always the first goal of adjusting a trade, is decrease the risk. But then second, we want to make an adjustment that also leaves us some room in case IYR does come back around. It's actually been on a really long win streak. I don't necessarily think it's going to keep up this win streak without having a couple of down days in between.

You can see it's been a number of days in a row and I think that we can definitely see a drop here between now and expiration. Remember, we've got this trade all the way through March expiration which is here. We don't want to pin ourselves into a small potential profit range just for the sake of making an adjustment too early in the cycle.

I think that's something that a lot of traders do, is they make an adjustment really, really at the beginning of the expiration cycle and they don't really think about how the rest of the trade might work out if it does come back around. In our case, you can see these are our short strikes, this is our position here tagged by the position arrows in Thinkorswim, and you know we've got the 70 calls and then we bought the 72's.

With the stock trading in between there, we do want to make an adjustment to reduce the risk. This is our risk profile in this call credit spread. What I always suggest people do (and this is what we teach at Option Alpha) is to make an adjustment by selling a corresponding put spread to our call spread.

What this is going to do is it's going to turn this entire position into an iron condor. The reason that we want to do that is because we don't want to add any additional risk to this trade and we basically just want to reduce the risk and basically realize that the market has moved higher and we need to adjust our positions accordingly.

If you don't want to add any risk to this trade, the one way you can do it or the best way you can do it is to make sure that your new corresponding put spread, when you sell a new put spread to add on top of this to create that iron condor, that you do the same number of contracts, so we'll do three contracts, and you do the same width of the strikes which is $2 wide.

We want to make this an even and a balanced adjustment. We don't want to go unbalanced here. In our case, what we're going to do is we're going to do something come a little bit closer, but again, still leave ourselves some room to make some money. And in our case, I like going to the 68 strikes.

I think the 67 strikes, even though they're about the 15% probably of being in the money which is where I usually start, I just don't think that we'll get enough premium by starting to sell those at $33. We're not really going to get the bang for our buck in making this adjustment.

And I'll show you here in a second why that is. But we're going to go with the 68 strikes to start with. What I'm going to do is I'm just going left-click on the 68 strikes and then I'm going to right-click on the 66 strikes. And that's going to give us an adjustment that gives us about a $20 credit for each of these contracts.

Now again, we're going to scale up here to the three contracts to match the three that we already have. And you'll notice that the width of the strikes on both sides is even. By doing this adjustment, it adds absolutely zero additional risk to the trade, meaning we cannot lose any more money.

In fact, we can only lose less money by making this adjustment, probably like $60 less in case IYR just continues to move higher and we don't make any adjustments from here. And again, that's the whole goal of making adjustments. Don't kid yourself here. Adjusting a trade is about stopping the bleeding.

It's about saving the patient on the table and reducing bleeding in your portfolio and then still maybe leaving an opportunity for profit. But if you get into a situation where you need to adjust the trade, your first and only goal should be to reduce risk.

Now, the reason that we can't do the 67, 65 in this particular instance is because if we did that, we wouldn't take in a lot of premium to do so. Notice that the premium goes down by about $.6 or so to do the 67, 65s. We're taking in $14 of credit.

Again, in my opinion, I still don't think it's worth it. I believe we go a little bit closer to where the stock is trading right now. And this is just a preference thing. It's not a hard fast rule. But I think we go a little bit closer to where the stock is trading and taking that $20 credit. Now, this is our new resulting position now that this adjustment is in.

And you can see it's got that nice iron condor shape to it in the profit loss diagram where I was looking at that green line. It did reduce risk on the top side. If the stock does continue to move higher which we hope it doesn't, but if it does, then we got to deal with it. It's going to reduce our risk by about $60.

Now, we can adjust this trade again in the future if needed by rolling up our put side from the 68s up to the 70s. We can adjust it and move it up two more dollars, but I don't want to do that just yet because again, 22 days to go until expiration, we still want to leave a nice profit window in here between about 71 and 67.

If we go back to the charts here, you can see that our profit window is basically right in here between 71 and about 67 which is in here. Just a little bit of a move down is going to help. And believe me we have time, so we don't need to be super, super aggressive in adjusting this trade.

This is the window that we want the stock to fall in at least right now. I like this trade because it reduces a little bit of risk that we have, but also leaves an opportunity to make some money. Now that we have this trade analyzed, we're going to hit confirm and send. It's going to bring up our order dialog box.

You'll notice that this buying power effect for this trade is absolutely zero. It does not add any additional risk to our portfolio whatsoever. And we're going to try to fill it at 20 and see if it gets filled here. That order just got filled. Okay, live time, good, I didn't have to pause the video.

You can see now that that adjustment is in there at 20. We now have that additional position in for IYR which is now working. What we're going to do is now manage this entire thing like it's an iron condor. That's our adjustment trade in IYR. As always, I hope you guys enjoy these videos. If you have any comments or questions, please ask them right below. And until next time, happy trading!

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