Lesson Overview

Guide to Adjusting Straddles & Strangles

Need help with options trade adjustments? This in-depth video guide will be your ultimate resource we the specific strategies and techniques we used adjust options trades that moved against us and turned losers into winners. Plus, we're giving you multiple real-life examples and case studies from our own account.

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  • Once we start adjusting it’s all about cutting losses first (profits are secondary). We’ll still aim to get out at a profit if possible but the whole concept is to turn the would-be $500 loser into a smaller loss of $100 or something like that.

  • Calendar orders move a single strike out at time. Double Diagonal orders more 2 strikes out at one time. So it’s the same concept just done with different orders.

  • Yes if we can get the entire strategy out in one order; great!

  • Good question but what you are missing is that the requirement to take in a credit and roll to the next month allows us to lock in a smaller loss than we would have otherwise taken AND it gives us more time to be right if the market does turn around. For example, if we sold a $5 wide iron condor for $1 credit then our max risk is $4. Why take a $4 loss at expiration if we could roll to the next month for another $0.50 credit thereby increasing our overall credit to $1.50 and reducing our max loss to $3.50? Sure we don’t expect the trade to win out necessarily but the point isn’t to win it’s to reduce risk first and foremost. If we went your route, closed it for a loss then we would lock in a $4 loss with no chance or recouping that investment. Make sense?

    • leonard613

      Tnx for the quick response, Kirk, but I’m still somewhat befuddled. But then I’m sure I don’t have your expertise and experience on this matter.

      For example, the way I see it, when you roll out to the next month, there are TWO transactions involved usually very closely executed in time. There is the CLOSING transaction on the current loser holding followed by the OPENING transaction on next month’s NEW strangle. Here’s where your solution puzzles me.

      The moment you CLOSE the loser, you have taken the full LOSS, $4 per your example. Now I ask you to FORGET this transaction for a few moments as I ask you to reflect on how you pick your trading candidates. Whatever methodology, I’ll bet you probably look to OPTIMIZE the outcome by some sort of ranking filter process. I’ll also bet that if, before you complete your rollout, you performed your process on the UNIVERSE of options available (which includes your current loser-candidate for next month) you’ll probably find there’s ANOTHER candidate that beats the loser’s rollout probabilities. If that’s the case, why would you place your new “bet” on the loser’s rollout when the odds for winning are better somewhere else.

      Intuitively, I feel that my goal should be NOT to “lock in smaller losses” but to keep betting each time on the highest probability WINNERS even if they are on other horses when we make our bets.

      Note, I’m not saying you’re wrong with your loss-mitigating philosophy; you well may be right. I don’t know and that’s why I’m befuddled. Most every other guru I’ve read on loser adjusting strangles, seem to agree with you. I’ve never ready anything on my idea. So all I can say for now is that I still don’t get it.

      I hope I’ve made myself clear enough to point out any flaw in my thinking. Therefore, I hope you have the patience to provide me with additional clarification

      • I think the reality is that I never am strapped with being over allocated and not having enough cash that I won’t have the ability to roll a trade to reduce risk. Sometimes it’ll take 5 months to turn a $2,700 loser into a $400 loser (which happened recently for us with an EWZ position) but if we haven’t kept rolling for a credit we would have never turned that around. Even re-entering new trades at higher probability levels would have resulted in a higher loss overall. If you only had let’s say $1,000 in your account and you could only choose between rolling this trade or entering another one at new probability levels – sure that makes sense. But in nearly all cases this is the exception. I think rolling still is best for any trade AS LONG AS you can get a credit on the roll.

      • leonard613

        While I still think, from a strictly economic sense, that your reality is not the correct one, I must confess that the appeal of your philosophy is such that I often find myself trading with it, anyway. I guess it’s the basic human instinct in me (us?) that we don’t want to see LOSERS chalked up, ever, in our trading history. Hopefully someday someone will do a back trade analysis on this subject to give us both a more objective finding.

        Thanks for your time. Keep up the good work.

      • Martin

        Hi leonard, I was actually thinking the same thing (why don’t we simply take the loss and use the energy to focus on a different stock?) but I think that you actually have an advantage when you stay within this trade –> You already have a clear losing “direction”!
        What I mean by this is that you have to realise that the stock is making a low probability move.
        By getting additional credit, you narrow the risk, but more importantly, you push your breaking even point closer to where an “efficient market” could go back to: there’s a good chance that a big move in one direction will be followed by a correction –> the closer the breakeven point, the greater the chance that you will avoid taking the full loss.
        All of this makes sense, of course, if you started with a favorable probability trade in the first place: again, this is exactly what Kirk is teaching us to do.
        I hope it makes sense :)

  • Yeah you do have to be a little more cautious as you get more and more inverted. Generally if I can increase the credit AND keep the overall credit wider than the inverted strikes I might make the adjustment.

  • If you can roll AND move strikes into a more favorable position AND still get a credit then yes it’s worth it. That said, you won’t always be able to do that and we are just playing the market efficiency in that we always believe random 2+ standard deviation moves won’t continue in the same direction forever without a reversion to the mean. Hope this helps!

  • Jeff F

    Hello. If you keep adjusting is it even necessary to implement the 3x hard stop order process?

    • I don’t necessarily use it because I think long term it doesn’t make a huge difference and rolling and adjusting is much more advantageous.

      • Jeff F

        Agreed, thanks.

  • Very helpful video, Kirk. Following along with the case studies make all the difference for me. Thank you!

  • Hywel

    Great video Kirk, one of your best. Very useful and informative to see adjustments with real case studies.

  • Stan Bednarek

    Kirk, I am currently going through track #3. I am really enjoying this track, especially the mention to portfolio beta weighting as well as undefined risk strategy adjustments. You have put together a very nice presentation and I hope others realize the ease of understanding you present. I have been through many courses and they surely don’t explain as well as you do. Thanks and I will be more active in the near future…..

  • Yes of course – it never goes 100% according to plan but having now backtested roughly 8 million option strategies and adjustment variations, the framework we present here was 100% confirmed with data which we’ll be rolling out in the next 2 months. If we are taking in a credit on the roll/adjustment then it’s more often than not going to reduce risk dramatically.

  • Adjusting defined risk positions is the next video in this track.

  • Michael82

    Appreciate the case studies to drive home your points. One question I have though is, do you ever factor in broker commissions/fees into your adjustment strategies? A second question I have, is how long should one realistically keep adjusting trades … at what point do you cry uncle and just move on? Thanks!

    • I don’t for the videos but of course do for personal stuff – I pay a cheap commission of $1.25 per contract so it doesn’t eat into it that much. I think ultimately each trade is different as far as how long you hold it and adjust. Generally I’m more into adjusting ETFs for a while than single stocks.

  • So glad it helped and thanks for the feedback Jim!

  • Calbear

    This was excellent! I’ve been trading options for a number of years and adjusting straddles and strangles has been a huge problem for me. I’ve been doing it wrong all these years. Thanks Kirk for setting me straight.

  • I think ultimately it’s a judgment call as you have to look at how far this stock is from your strike prices each month that you consider rolling. If the new stock price is further away from my strike prices and it was the month before when I ruled I’m always less optimistic about rolling the contracts again and would rather just close them for a loss and reset probabilities.

  • Yeah I get what you’re saying and most people think that it helps to do that but our backtesting confirms that it’s just not the case. You are better off holding the ITM option and doing the adjustment as we outlined.

  • Yeah mainly what we are seeing is that the underlying doesn’t move in a straight line in one direction. So on a big move up or down it tends to mean revert and retrace it’s movement which gives you ample time and credit to exit more often than not.

  • Stuart

    Hi Kirk, In the example of rolling the straddle, do you always roll out to the next monthly strike? Or do you sometimes roll out to a weekly strike in the next month? Thnx.

    • Typically the monthlies since they often pay more for the roll.

  • Sure yep sometimes after commissions we might lose overall of course – but we still reduced risk and cut the loss.

  • Jonathan Lim

    Hi Kirk, thank you for the informative video. A real eye opener. I have a question. Hope it’s not too silly. It’s about your last trade OIH when it went inverted. The put at 24 and call on 22. The total credit taken after the last roll was 3.73. Does the mean the breakeven points would be 22+3.73=25.73 on the call side and the put side 24-3.73= 20.27? And if OIH finally traded in between those 2 new breakeven points we would come up with a profit or a smaller loss when we finally close it out? Thanks

  • Thor

    ultimate resource we, (with), the specific strategies

  • Huub

    Kirk, I understand the concept of rolling your options, but what if the stock keeps moving against you. At what point will you say enough is enough?

    • From the backtesting we’ve done we found somewhere around 3-4 months is when you just have to close and re-set the probabilities.

  • Risk should always be limited by position size. Even if you decide to trade straddles and strangles (which require more margin or risk) you are compensated much more so for trading these with higher average profits and win rates. So the market is efficient in that if you make a limited risk trade, you have a slightly lower win rate and overall profit.

  • I think going inverted is fine as long as the overall credits cover the inverted spread – I don’t favor the ratio as it adds more risk.

  • I never account for commissions in these videos because it varies greatly – I only pay $1.20 per contract which is either less or more than others but that doesn’t change the overall strategy.

  • Jerome Yurow

    Leonard. It looks like Kirk’s rolling strategy is the logical extension of his overall philosophy of holding on to losers as long as possible to give them a chance to become even small winners.

  • Jerome Yurow

    Kirk. You seemed to know just how much to slide the unchallenged side of the trade toward (or past ) the challenged side. Did you perform any side checks using the ThinkOrSwim Analyze screen to check the effect of several moves before pressing the Send button? Also, if the Straddle is actually an Iron Butterfly, should you be careful to retain the distance between the long and the short options?

  • I wish but no – with defined risk trades yes you could keep rolling *as long as you are taking in a credit to do so. With undefined risk trades after 2-3 months of rolling the backtesting shows that it’s just not worth doing anymore.

  • John

    Thanks Kirk. Many coaches just show the winning trades but you showed us the losing trades and the technique to minimize risk. Superb!

Show Video Transcript +

In this video, we're going to talk about undefined risk options trade adjustments.

So I'm going to cover the exact techniques and strategies we use here at Option Alpha to adjust trades with undefined or naked risk profiles. So these would be things like straddles and strangles.

Trades that are usually very hard for people to learn how to adjust, but we're going to try to do it here in a very clear way, presenting a lot of specific details and case studies for you.

So again, I'm going to show you how I was able to recently take five trades that went 100% against us, meaning the stock went completely in the wrong direction that we thought it was going to go or moved much further outside of our expected range than we initially, though, and turn them around for multi-hundred dollar losing trades.

Now, as always, the key point here is to remember that, when making adjustments, your number one don't want to move the losing side of the trade. This is one of the things that most people miss when they start making trade adjustments is they move the side of the trade that the market is moving against.

So if the market is rallying higher, you don't want to move your call side. You don't want to compound the losses by moving that side. If the market is falling and moving lower, you don't want to move the put side of your trade, meaning you don't want to roll down your puts and compound the losses that way.

Number two is, you always want to take in a net credit. If you can't take in a net credit to make adjustments on short premium trades, it's not worth it. It's not worth paying money to make an adjustment. All you're going to do is increase the risk in your trade, which you don't want to do.

Number three is, whenever possible, we want to re-center the trade. And what I mean by that is reset our probabilities, try to get the trade strategy profile sitting over top of where the stock is now.

We want to acknowledge the fact that the stock has made a big move in one direction or another and, using our adjustment techniques, we're trying to re-center the trade over where the stock is trading at the moment. And number four is, we want to widen the break even points.

This kind of goes along with number two, is that when you take in a net credit, you start banking this huge credit as you're making adjustments and that credit helps widen the break-even points on the losing side, and that's where we get a lot of the strategy and technique from is widening those break even points and giving ourselves more time to be right.

So this video's going to be a little bit longer than most of our videos, but I think it's warranted, so I guarantee by the end of this video you'll have a clear understanding of how to adjust some strangles and straddles as part of your training.

So the first thing that we want to talk about is short, strangled adjustments. Now, short strangles is very high-probability neutral trades with options far out of the money. So it's important to have a set of rules for placing adjustments so that you don't over-adjust trades.

Now we already talked about this in one of the videos here in track number three, so I'm not going to cover it, but it's worth warranting a comment here again.

Now that said, if the stock moves toward one end of the strategy quickly, you'll want to first adjust the side of the strategy that the stock is moving away from by moving that option closer to wherever the stock is trading now.

So for simplicity's sake, let's assume that you sold options on either side of the market at at 15% probability of being in the money. That's about a 15 delts on either end and for just the example here, this is usually what we do here at Option Alpha anyways.

We build all of our strangles to have about a 15 delts on either side for the short strike. So we'll basically look to adjust one side when the short strike increases to maybe, say, a 30 delta, or a doubling of risk.

Now let's say, for example, that the stock starts moving down towards your put spread or your put side strike. So in this case, it would move down toward the put strike, which is right here, that's where the stock would be moving towards.

What you're going to do in this case is you're not going to adjust the put side of the trade. You're going to leave that put side on; it's moving against your puts, you're not going to touch that side. All you're going to do now is you're going to roll down your call spread or your call side closer to where the stock is trading.

So let's say, for example, that your initial call spread strike is at 50, you would roll it down to something around 45. So you're rolling that call side down closer to where the stock is.

And by doing that, you take in an additional credit because remember, if the stock is falling away from your call strike, you're going to make money on that called strike, so you can buy it back and bank a profit and sell a called strike closer to where the stock is trading. And that new credit helps move your break even point out further on the put side.

So if you take in, let's say a credit of an extra $75, that credit of $75 is going to help move your break even point out on the put side just a little bit further. It's going to acknowledge the fact that the stock has made a move lower and it's going to help move that put side break even point out a little bit further.

Now a key here is that you have to make sure you're doing the same number of contracts during the roll so that you don't take in any additional risk. And what I mean by that is that if you sold let's say two puts and two calls, you're going to close out of your two calls and resell two new calls.

You're not going to sell three new or five new calls; you're not going to increase the risk size here. So you're going to stick with the same number of contracts that you had originally, so you have no additional risk in this trade.

Now, the new, more narrowed and taller strangle is going to help widen your break even points, like we talked about, and more importantly, it re-centers the trade over the new stock price. So if we go back to let's say the old chart here of the strangle, you would ideally enter a strangle when the stock is trading right in the middle of the range.

Right? So an even distance between your puts and an even distance between your calls. Now with this new strangle that we have, this new adjusted strangle, notice how if the stock is moving closer, and this dotted line represents our new kind of post-adjustment strangle, notice how the new strangle is sitting more centered over top of the new stock price here.

So if the stock price is now centered here, it's definitely made a move lower, your new post-adjustment strangle is now a little bit more centered and balanced around where the stock is trading. So this is a clear example of how we use this technique with short strangle adjustment strategies.

We're going to go over a couple of examples here in a second, but I want to first get through some short straddle adjustment techniques. It's very, very similar to strangle short. Obviously, it goes without saying that if the stock moved higher, we would roll up the puts in that case, in this example that we just went through here with short strangles.

The stock was moving lower, so we rolled down our call spread side. So let's first talk about some short straddle adjustments and then we'll get into a bunch of different case studies that kind of prove the point and show you with some real numbers from trades that we've done in the past.

So because short straddles have very much the same at the money put strike and call strike, it's obviously much harder to adjust these positions because you don't want to go too far inverted on these positions.

You already have strike prices that are exactly the same sitting right over top of where the market is trading. So entering these trades is usually going to give you a large credit to begin with, which will naturally make your break even points really wide.

So you usually take in a much wider, or a much bigger credit on these short straddles. That means your break even points are going to be much wider to begin with. And therefore, room to wait it out a little bit more during kind of extended stock runs.

So you're not going to be as jumpy to adjust a short straddle and hopefully you'll entered it when implied volatility is really, really, high, which is when you should enter these and be a little bit more aggressive.

Now, however, let's assume that you sold a straddle directly where the stock is trading, and it took in a huge, let's say $10 credit. What you would look to do is adjust this trade if the stock rallies significantly beyond kind of our break-even points and there's a lot of time left before expiration.

So if the stock is still moving within a $10 range up or down, you're not going to adjust the short straddle. You're still going to play the volatility assumptions and bets that we have on lower volatility. You're still going to play that.

But if the stock starts moving kind of beyond our break-even points or starts significantly moving outside of our break even points, and there's a lot of time left, then we can start making adjustments.

Now the adjustment technique is very similar to what we did with short straddles, and we're going to do it in the opposite direction. So we're going to assume now that the stock moves a little bit higher now and goes towards our short call spread side and moves beyond our short call spread break even.

So if that's the case, then what we're going to do is we're going to roll up just the put side closer to the stock price and take in an additional credit. Again, at this point, you're going to have to go a little bit inverted here.

Now, you don't want to get too carried away in going inverted, we'll show you some examples of how we did it on some live trades so you can see what the process is, but you will go inverted. And what that means is that your call strike is going to be below your put strike.

So you're going roll up your put strike to some strike higher and go inverted. Now again, what's that's going to do is it's going to help you take in a net credit. That net credit is going to help move your break even point out just a little bit further.

So it's going to continue to move your break even point and kind of shift your entire payoff diagram over to the right. So notice how this new adjusted or post-adjusted straddle kind of shifts its payoff diagram over to the right by rolling up that put spread side.

Likewise, you would do it in the opposite direction if the stock moved lower. You would roll down just your call spread side. You're not going to touch your put; you're going to roll down just your call spread side.

Now it's important not to get too carried away with this and aggressive with adjustments. Again, the short straddle is not a trade that we use all too often; it's reserved for high, high, high implied volatility.

So that's what you want to focus on more so than adjustments, but you can make adjustment techniques to save positions. And again, we'll go through some examples here with you guys.

So that's the logistics of how we make adjustments. Let's go through a bunch of different case studies here. It's going to take a little bit of time to get through these but, again, I think it's worth your time to watch these because we're going to go through these in a lot of detail.

So the first one that we're going to look at is XLF. Now, this is a strangle case study that we have that we ended up making two adjustments to XLF and still ended up with a profit at the end of the day.

So the original trade that we had with XLF was back on February 10th, and we sold the 21 calls and the 20 puts. Notice, it's a tight strangle, it's almost a straddle in the sense that our strike prices were very, very close together. And we took in a pretty decent credit of about $1.17 on this trade.

Now, if we actually to our Thinkorswim platform, you can see these are all live, real trades, this isn't paper money or anything. And this was the original trade, again that we made back on February 10th.

So we had opened that new position here on February 10th, which was the $1.17 credit of the 21 calls and the 20 puts. Now what we ended up doing then as you can see here on this chart here, this was the date that we entered this strangle, and you can see that we pretty much picked the worst time to get into XLF because the stock rallied significantly beyond that.

And as the stock ended up rallying, what we did is we rolled up just our put spread strike. So remember, we originally sold the 21 calls, which were here, and we sold the 20 puts, which were down here. Okay? Now, we didn't touch the call spread side.

We left that 21 call strike there, we did not touch that even though the stock rallied against our position. What we ended up doing is we ended up taking our 20 puts, which were here, and rolling them higher as the market moved higher.

We rolled the side of the trade that the market was moving away from to increase our overall credit and net gain on the trade. So on March 4th, we bought back our 20 puts to close those because we had made a little bit of a profit on those and resold the 22 puts.

Now we did this in one vertical spread order, so we bought back our 20 puts, resold the higher 22 puts, again notice we didn't touch the call side, and we took in a net credit after doing that of an additional 30 cents. So now we add that 30 cents to our original entry and now we're at a credit of about $1.47.

Again, if we go back to our screen here, you can see this is the trade on April ... I'm sorry, March 4th. We did the vertical spread, we opened the new 22 puts, we closed the 20 puts that we originally had, and we did that for a net credit.

As the stock continued to rally and continued to move higher, on March 16th we rolled the entire strategy from March to April. Now this is really important because now, instead of just rolling up the short strikes as we wanted to do, because we didn't want to go too inverted here, remember we now had the 22 puts and the 21 calls, so we were about $1 inverted.

But what we ended up doing as we went closer to March expiration is we rolled the entire strategy from the March contracts to the April. We kept the exact same strike prices and again we took in a net credit of $30. So now our total credit is now up to $1.77 on this entire XLF strangle.

So again, going back to our charts here, you can see we used one single, double-diagonal order. You can do it in two orders; it doesn't matter. We closed out of our March strangle, and then we reopened the same strike prices out in April.

So we closed out of March, reopened the same strike prices in April, and did so, all of that trading, for an additional $30 credit. So now you can see, we just continue to bank these credits.

And more importantly, what happened here at the end of the March cycle, which is here, this is the end of March, you can see the stock went completely against us. 100% against our original trade in the wrong direction.

But what we did is we gave ourselves another 30 days for the stock maybe to come down, for volatility to come down, for some time decay to start working its way out of this trade. And that's really what we were banking on by rolling the trade from the one month to the next.

Now what's also important here is that you remember that our net credit is almost $2 at this point. So we've now increased our net credit almost $2 from the original trade. The original trade had a net credit of $1.17. So we've increased it to almost $2 now and what that does is that moves our break even point almost $2 beyond our call strike, which is up here at $1.21.

Remember, we never moved our call spread strike at 21. But now our break even point is $1.77 higher, which is right about here, kind of on the short strike side.

So that's really what we were looking at as kind of like a hard break-even point at expiration. So if the stock went all the way to expiration, it would need to be down here for us to be making money back on this trade.

But we got a nice move down in implied volatility during that period and what we ended up doing on April 5th, so we ended up holding the trade for another 25 days beyond rolling it. We held the trade for another 25 days, and on April 5th, we closed out the entire trade for a net debit of $1.51.

Remember, our total credit was $1.77, so closing out the trade and buying it back for less than our net credit left us with a nice profit at the end of the day. No, we did hold on to this trade for a long time. Remember, our original position was entered back on February 10th.

So we held this trade for a long time, but you're looking at a trade that could have been a multi-hundred dollar loser if it was exited at the end of March expiration and now just giving ourselves just a little bit more time and adjusting this trade, it ended up turning it from a loser into a winner.

So again, here inside of our trade account statement, you can see back on April 5th, just a couple days ago from the time I'm recording this video, we closed out of both of these contracts, the 21 calls, the 22 puts, for a $1.51 debit to remove the entire position out of our portfolio.

So again, adjusted this trade from a total loser, going 100% against us, into a small winner. The next case study that we're going to look at here is EEM. And this is another strangle case study. Back in August, we went ahead and sold the 37 calls and the 32 puts, so a little bit wider spread that our XLF case study that we just went through.

Again, we sold the 37 calls and the 32 puts, basically took in a net credit of about $70. So a very wide trade here on EEM had high implied volatility. We thought the stock was going to stay range-bound for the time. So we wanted to take in a nice little credit of about $70.

All right, so again inside of our Thinkorswim platform in our account statement, you can see our original trade here was back on August 12th. This was the strangle to open for EEM. We sold the September 37 calls and the 32 puts for a $70 credit.

Now if we go to the chart here, what we were looking for, and this is the August 12th day right here, so this is the day that we ended up selling the spread. Right afterward, the spread made a huge, or the stock made a huge move lower. Moved from 36 down to about 30, which is a big move for a $30 ETF.

But we had initially sold on this day, we sold the 37 calls, which are here. So that was our line in the sand on the 37. And then we sold the 32 puts down below the market.

Now naturally, you can see that the stock moved apparently against us as we went closer and closer to the middle to end part of August. Now what ended up happening on August 24th is we went ahead and bought back our 37 calls that the stock was moving away from.

So again, we did not touch the put side of this trade; we only rolled down our calls from 37 because the stock was now falling lower, and we rolled those and reopened new calls at 32, so much closer. And by doing this, we took in a net credit from the difference in buying and selling of $67.

So we add that to our total credit or our original credit of $70 and we're looking at a total credit now of $1.37. And again, that credit is going to help move the break-even point a little bit lower. So logistically what we did is we took our 37 strike calls, and we rolled those all the way down to 32.

Okay? So we rolled those all the way down to the 32 strikes, basically gave ourselves the straddle right over the market at 32, trying to collect as much premium as possible and be a little bit more aggressive than usual.

Again, when we go in here to our account statement, you can see that this is our adjustment trade 8/24. We closed out of the 37 calls, we entered into the 32 calls, and we took in a net credit of $67 on that adjustment.

Now a little bit further into the month, we kind of let this trade work a little bit more. So we were hoping that the stock would apparently stay around 32 or so. Rebounded. And as we went closer to September expiration, what ended up happening is the stock rallied much further than expected.

So now the stock rallies much further than expected, kind of overshoots our trajectory of where we want it to be. Well, on September 15, we rolled the entire strategy from the September expiration month to the October expiration month.

Again, all we're trying to do here is maintain the position that we have. If we can roll and extend the trading timeline for credit, that's what we're going to do. We're going to give ourselves a shot at making some money later on.

So we rolled the entire position from September out to the October expiration for a net credit of $94. Now again, we add this to our rolling credit that we have, so we've got a total credit that we're working with now of $2.31.

Remember, with our short strikes at 32, a credit of $2.31 bring our break even points out past 34 and down past 30. So now we've got a nice, big credit that we're working with which is much larger than the initial $70, or 70 cent credit that we had in the initial trade.

So now you can obviously see what happened in October. The stocks continued to move as it went through the October cycles. So now when we get to October expiration, which is this red line here, stock continued to move higher, really didn't move that favorable.

We were still looking for the stock to be centered around 32, which is almost $3 or $4 lower than the stock was at the time. Again, you can see inside of our account statement, we used a calendar spread order on both sides to roll the contracts from one month to the next.

So we rolled the calls out from September to October; we rolled the puts out from September to October, and again you can see the net result here is that we took in a nice, big credit on this additional roll from one month to the next.

So we didn't change the strike prices, we didn't do anything with that, we just rolled the contracts from one month to the next, took in a total credit of $94 on that roll. Now as we went closer to October expiration, we again rolled the entire strategy out from October to November.

So now you can, we've been in this trade for a long time, but we're still sticking with the system. We're still playing the probabilities; we're still continuing to take in a credit on the entire trade.

So we take in this net credit of an additional $39 on this trade to roll it out from October out to November again, and now we have this total credit that we're working with of $2.70.

So we've increased our trade credit from the original 70 cents out to $2.70. Notice, we're getting paid to continue to hold this trade and that's all it's about is continuing to reduce risk by getting a credit and maintain the position another month out.

So now you can see, we've rolled this entire position out from October to November. So we used one single, double-diagonal order to accomplish this back on October 9th. So we rolled the trade from the October strikes, we closed those out.

Notice, we did the same strike prices, we have not moved the strike prices. And we rolled it out to the November contracts, which are the new contracts. Again, same strike prices for a $39 credit.

Now at this point, we've now extended the trading timeline all the way out to November, which is her. Okay? So now we've extended the trade one time out to October, a second time now out to November.

We just keep maintaining this position and looking for the stock to come back, all the while taking in a net credit to do so. Now obviously, as we got further through the October cycle and into November, the stock did end up making a run towards 32.

Remember, we've got about $2.70 credit now, so our break even point now is up around basically about 35 1/2, $36. So we've got a wide break even point, much higher than our initial one around $32. So a little move now inside of this range gave us an opportunity to close out of this trade and get out for a net profit.

So on November 9th, we were able to close out of this trade for a $2.50 debit. Remember, our total credit that we had working here was about $2.70, so we ended up making about $20 on this trade after extending out a couple of months.

Now, most people will think okay, why do this for three or four months to make 20 bucks? Well, what was the alternative in this case? In this case, if you close out the trade the first expiration cycle, you would have been looking at a multi-hundred dollar loser potentially, because the stock moved completely against you.

If you rolled it to the next month, the stock was even worse off the next month, and you would have been looking at an even bigger loss at that point.

But we had to remain patient and diligent in keeping with the program that we have laid out here in rolling for credit, not increasing our position size, maintaining the position and extending our duration, and that gave us eventually an opportunity to turn a multi-hundred dollar loser into a small winner.

And I don't know about you, but I think that's what trading's all about. So let's go over another one here. We've got the Qualcomm strangle case study that we're also going to cover. So back on February 2nd of this year, we got into a Qualcomm strangle.

This was the 48 calls and the 37 puts. Notice, it's very wide, so more than $10 wide on this particular trade, and took in a nice, reasonable credit of $95.

All right, so here we are back on my account statement at Thinkorswim. Again, back on February 2nd we got into this trade in Qualcomm, opened this wide strangle for March. We sold the 48 calls, sold the 37 puts and took in that nice, reasonable credit of about $95.

Now, when we got into this trade on the 2nd of February, again that was basically at the low end of the spectrum. And Qualcomm had a huge move after the company had some favorable analyst changes and some favorable news.

The company had a huge reversal after earnings and moved from 43 up to about 53 at the high of the range. So definitely a trade that was unexpected couldn't do anything about it. But something that went completely 100% against us.

Now, remember, we had originally the 48 calls, which are right here. So that's where we had our call strikes at 48. Notice, the stock went 100% against us and blew through that barrier very, very quickly.

So what we ended up doing on February 24th is we rolled up our 37 puts. Now again, notice we did not touch the call side. We didn't roll the call side; we left it there. We realized it was going against us. But we're not going to compound our losses by moving that call spread side.

So we took our 37 puts, bought them back because they were practically worthless, sold our 45 puts, which is a new contract, and took in a net credit of 30 cents. So this gave us a total credit of $1.25 now. Again, we're adding that 30 cents to the $95 original entry credit that we had on Qualcomm.

So this is our new trade here, you can see we did this vertical on the 24th, closed out of our 37 puts. Notice that they're now worth $6, we originally sold them for 44, and reopened a new trade at 45. And notice that we opened that trade for 36, so the net credit difference is an additional $30 credit that we took in.

Again, and this something I did mention before, but it's just worth mentioning again. Notice that we didn't increase the position size at any point across the board here. So we're not adding to this trade at any point.

So we just rolled up our puts from 37 up to 35. So now we have our put spread strike, which is right here. And now we have our call spread strike, which is at 48 still. Haven't touched the call spread strike, we're still working with the put spread strike at 45.

Now on February 26th, so just a couple days later as we got closer to expiration, we went ahead and rolled the entire strategy from March to April. So notice that we could take in a pretty good credit by rolling this entire trade out, realizing that it had gone against us, it probably wasn't going to move back into our range any time soon.

So we wanted to get as much credit as possible by rolling the trade out to the next month. So we moved the entire trade from March to April for an $82 credit. Again, that adds to our rolling credit that we continue to bank and we're now at a $2.70 credit. So here's our trade.

Again, we're in here, we door double-diagonal, which is how we rolled this entire thing. We closed out of our March side, the 48 calls, the 45 puts, reopened the same strikes in the next month, which is April and took in a big $82 credit. So now our total credit is about $2 in this trade.

Now again, remember where our call spread strike is. Is that on the top side, 48. But our credit of $2 plus moves our break even point out above 50, so our break-even point, because of the credit that we received on all of this rolls, has now been wider than our call spread side.

That's why we don't ever touch the call spread; we just use the put spread side or whatever the side the markets moving away from to roll and increase our credit and that helps move our break even point out further, beyond our short strike.

So now by rolling out to the April contracts, we gave ourselves time to see the stock come back into a little bit of a range, have a small kind of retracement on for the high, back down to around 50, and what this did, this gave us an opportunity then on April 5th to close out the entire trade for a net debit of $2.35.

Now, our total credit of $2.07 still means that we ended up losing a little bit of money on this trade. It was one contract, so we ended up losing about $30 or so on this trade. But at the end of the day, rolling this contract out to the next month and adjusting it like we did, saved us from a multi-hundred dollar loser that we would have potentially had.

So if we had not rolled the contracts and we had kept everything as is, by the time that we got to March expiration, we would have been left with a multi-hundred dollar loser instead of maybe a $20 or $30 loser.

So I wanted to kind of show you guys this one as well because they don't always work out to be completely profitable when we make adjustments, but we were able to buy this thing back for a $2.35 debit.

Again, that was a significant reduction in risk, all by making these same systematic adjustments and rolling contracts and extending the duration in our trades.

So another case study I want to go over here is VLO. So VLO is another strangle that we got into on February 8th. We went ahead and sold the 62 1/2 calls and the 42 1/2 puts. Notice, very wide strangle, so very simple 70% chance at success trade.

Looking for VLO to stay pretty much range-bound and we took in a net credit of $1.56 on this original strangle. So looking at our chart here of VLO, the February 8th date is right here. So once again, we got into a trade right before the stock made a huge move higher, right?

A stock moved that nobody saw coming. Big rally in oil, significant two-month rally. Again, we almost picked in this trade by getting in here on 2/8. So if we go to our trade tab here, you can see our initial entry position right here on 2/8.

We opened up the March 62 1/2 calls, 42 1/2 puts for a $1.56 credit that we took on this trade. Now, as the market started to rally and as VLO started to rally, on February 26th what we ended up doing is moving, you guessed it, the put side higher. So we did not move the call side.

We left our 62 1/2 calls exactly where they were, and we bought back our 42 1/2 puts and resold new puts at 57 1/2. Took in a net credit to do so of 96 cents. So that brings our total credit to $2.52 on the entire trade.

And if we go back to our trade tab here, you can see we closed out of our 42 1/2 puts, we reopened our 57 1/2 puts, and we took in a net credit of 96 cents to do that. And so we're starting to make adjustments slow. So this is back on 2/24. So right about here.

So as the stock is moving a little bit higher, it's not completely against us at this point. Remember, we still have our 62 1/2 calls, which are up here. But now we've rolled up our puts to something around 57 1/2. So we started rolling these a little bit higher.

And again, notice that we tried to re-center our break even points around where the stock was trading. The stock was trading right around 60, we wanted to have our calls and our puts re-centered and kind of even and balanced regarding, or now realizing that the stock had made a big move higher.

We didn't get too aggressive at this point; we're making slow, small adjustments. But after that date, apparently, we noticed that the stock continues to move higher. So all we did was just continue to roll up our put spread side.

So on March 3rd, we went ahead and bought back now our 57 1/2 puts, which are profitable and resold the 62 1/2 puts, basically creating the straddle at 62 1/2 for VLO. Again, we took in another $95 credit and now we took in a huge total credit overall, after all, adjustments so far, of $3.47.

Now again, you have to remember that this huge $3 and 50 cent credit moves our break-even point that much further beyond 62 1/2. So now we get to March expiration, our straddle is right here at 62 1/2, that's where our strike prices are. But our break even point is $3.50 out on either end.

So all we need is just for the stock to move down just a little bit between now and expiration and we can have an opportunity to close out of this trade before it gets too crazy and away from us.

So again you can see here, what we ended up doing on March is we rolled up our 57 1/2 puts. Remember, we originally sold these for 110 when we entered them the first time. They're now worth $33. We entered the new 62 1/2 puts to create the straddle and again took in a nice, big credit of $95.

So later on, we were able to then, on March 8th, let a little bit more time decay and volatility come out of the position as the stock rallied. On March 8th, we closed out the entire trade for a net debit of $3.30.

Remember, our total credit was $3.47, so we ended up making a little bit of money on this trade, even though the stock went completely against us. And again, here's our closing trade of $3.30 back on March 8th.

So it's incredible that you can have a stock that moves ... I mean look, we were totally wrong in our directional assumption. In fact, 100% wrong, like really, really bad in choosing the directions.

Not like we ever say that we're good at choosing the direction because we know we're not all that good at choosing the direction. But in this case, the strategy and the technique and the style of adjusting helped turn this trade from a multi-hundred dollar loser into a winner.

Remember, our original short strike on a strangle was at 62 1/2, which is right here. Had we done nothing at all, at the end of March expiration we would have been left with a couple of hundred dollar loser.

But by adjusting and rolling up the put side incrementally all month, we ended up making a little bit of money on this trade because of our adjustment technique.

So another case study that we're going to go through here, this is the last one. I know it's been a little bit long video, but hopefully, this has been helpful for you guys. I wanted to do a lot of different examples just to prove the concept here.

Especially with real trades that we're doing. These aren't fake or paper trades, this is real money that we have at risk. The last one we want to go over is a straddle case study with OIH. Now, in this case, we entered a straddle with OIH back on February 2nd as well.

So you notice, we got pretty aggressive around February of this year with some of our oil trades, assuming that oil would stay kind of range-bound. We sold the 22 calls and the 22 puts, okay? We took in a nice, big credit of $2.95.

So again, what we talked about earlier in this video, is that when you enter these straddles, you're going to take in a bigger credit naturally. So that means that our break-even point is going to be $3 above and below the 22 strike from the beginning.

But when we go to the chart here of OIH, what you can see is that again, when we entered our trade here in February, that we picked the bottom of the market. Now look, I always say we are not stock pickers.

That's something that we have to realize as traders we're not good at. Because nobody is good at it. But even though the stock went completely against us, we ended up turning this trade back around.

So this was our original entry. Again, right here we were playing the stock a little bit bearish just by a slight amount because we sold the 22 straddle, which was right here. So we're assuming Okay, look, you know, oil made a huge move lower, maybe it would stay range-bound to maybe a little bit lower.

A reasonable, rational assumption on how we would trade. And again, we were looking for the stock just to sit down into this range for the next month and a half because we had sold the March contracts out.

So what ended up happening, though, is of course the stock rallied and we went ahead on March 22nd and bought back our 22 puts and went a little bit inverted here and sold the 24 puts. So we rolled our 22 puts higher to the 24 strike for a net credit of $42.

Now we take in a total credit at this point, after all, adjustments so far, of $3.39 after rolling this trade higher. So basically what we did was, as the stock was rallying higher, we took our 22 strikers, which are here, and we rolled them up to 24.

Now we have the inverted 24 puts, which are here, and we have the 22 calls still at 22. We didn't touch the 22 calls. Never touch those. Again, we're not touching the side that the market's moving against. At this point, all we want to see is the stock maybe move somewhere in this range, okay?

That's our short strike range, but we notice that our break-even points are much higher because of the credit that we took in. So again, so we have a nice, wide break even point range on this stock. We just want the stock to stop rallying as quickly as it did.

Now when we go to our account statement here, you can see this was our original position here, and I wanted to show you guys all of these so you can see it. Back on 2/2, our original straddle that we sold here. The 22 calls, 22 puts. $297 credit.

Now, I'm not covering the other March position that's here because this was a profitable trade. You can see here that we had also sold another straddle at the 23 strike. We sold that one for a $320 credit and then bought it back for 220.

So that one was profitable, we're not factoring that in here, those were two separate trades, but I just want to show you there is another March trade on here, we're just not factoring it in.

But notice that on our second straddle that we did, which is the one that we're discussing here, back on 3/2, again we closed out of our 22 puts that we had and then reopened the 24 puts for a $42 credit. Okay? So now we did go a little bit inverted on this trade.

As we got further through March, we realized that the stock continued to rally. So on March 14th, we rolled the entire strategy from March to April. So did the same technique that we've talked about the entire time in this video.

Rolled the trade from March to April, kept the same strikes and increased our credit by net 32, or $34. That now brings our total credit to $3.73. Now we've been in this trade for about a month and a half.

So again, here's our double-diagonal order. We closed out of the March position with the 24 calls ... 22 calls and the 24 puts, entered the same strikes in April. So these are the new opening trades. And again, you can see that credit that we took in of $34.

So this is what happened, right? The stock continues to rally much higher than expected. We give ourselves more time by rolling our contracts from March, which is here, out to the April expiration date.

And notice that, during that period, that is just when the stock started to come back into our expected range. So, gave ourselves just a little bit more time for the stock to come around, to dip just a little bit. We never increased our position size, kept everything equal and balanced and continued to take in a credit the entire time.

So on April 4th, after a little bit of a move down in the stock, we closed out the entire trade for a net debit of $3.73, which was exactly what our net credit was. Ended up being a scratch trade.

Again, I just wanted to show you guys that sometimes they don't always work out and that's important for me to show you as a trade and hopefully as an educator and coach here, that sometimes they don't always work out.

But again, this trade was going to be a multi-hundred dollar loser had we done nothing at March expiration. The stock basically closed at the highest end of the range it had possibly closed at at March expiration.

Just by rolling the contracts out and extending our duration, we were able to give ourselves enough time to see the stock come back into range and become a little bit profitable.

So again, here's our trade to ahead and close out of the position, our strangle trade on March ... on, I'm sorry, April 4th. We closed out of both our 22 calls, again which we had never touched from the beginning, and our 24 puts for a $3.73 debit, basically gave us a scratch on the trade. But I will take a scratch any day of the week to avoid a big loser.

So here's the deal. Making all of this work require the following, and hopefully, you saw it because there was a lot of case studies here, a lot of examples: We never moved the losing side.

So whatever side of the trade that the market was moving against, whether the market was moving up towards the call spread side or down towards the puts, we never moved the losing side. We always moved the other side of the trade.

We always took in a net credit, we never increased our trade size, and we always extended the trading timeline whenever possible. That's the key to making these adjustments work.

Hopefully, this has been an insightful video on how you can make adjustments even when the stock goes 100% against your position as it did in all of these cases with the trades that we outlined here for you.

So, if you enjoyed this video, I'd love to hear your comments and feedback. If you have any questions, please let me know, ask them in the comment section right below. If you love this video, thought it was insanely helpful, please consider sharing this one.

I thought this was a great case study and I worked hard on making this thing actionable and insightful for you guys to help get you to the next level when you're making trade adjustments. If you thought it was helpful, please consider sharing it online, help to spread the word about what we're trying to do here at Option Alpha.

Until next time, happy trading.

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