Lesson Overview

Strangle Adjustments

Short strangles are very high probability trades with option far OTM it is important to make adjustments slowly with these types of strategies. That said, if the stock moves towards one end of the strategy quickly you'll want to first adjust the size of the strategy that the stock is moving away from by moving that option closer to the money.

Let's assume a stock is trading at $50 and you have the $45 put and $55 call strangle. If the stock rallies up closer to $55 call side you would move UP the put side from $45 to $48 or something along those lines.

And unlike what you've probably been told before in the past you should never move the side of the strategy that the market is moving towards. In our example above you would never move the $55 call higher.

Rolling one side out and up only opens up the door for compounding losses should the stock continue to move in that direction.

More Discussion

Was This Helpful? Add Comments/Questions

  • Leah Feldman

    What if the stock is going down towards the put leg then suddenly reverses and goes towards the call side, if it passes the strike on the call side, its unlimited risk?

    • That’s a possibility but that’s a great example of why you have to keep strangle and straddle position small in size compared to the rest of the portfolio. They carry more risk (also make much more money as shown here: https://optionalpha.com/members/option-alpha-performance) and you should be careful to use them only if you understand how they work.

  • Jeff

    Kirk, I’m a little confused on this trade adjustment. Let’s say for example the short put becomes threatened. If we adjust the call side down as an adjustment aren’t we risking getting assigned on the short puts?

    • Sure but remember that first, most assignment happens the week of expiration. Second, even risking assignment doesn’t mean we should roll the put side lower. That would lock in a loss for sure on the first put and then who’s to say that the market doesn’t just keep going lower.

  • I don’t prefer to take the assignment, I prefer just to close the position and buy back my short strikes.

  • trunner

    very good vid and explanations! my question: how often would you suggest to roll and would you even go inverted or accept a loss at a certain point?

    • We don’t roll that often nor go inverted. If we do go inverted it would only be when the credit received is more than the width of the inverted strike prices.

  • Yeah good questions I think that generally for ETFs I’m more in the camp of adjusting for a couple months if necessary. On stocks I’ll cut it off quicker (maybe after 2 months) and just move onto the next trade.

  • I wouldn’t say it’s the bulk of order entry but around there is reasonable.

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