Losing trades are part of the game - they are going to happen and it’s a reality we must all face. And I believe what sets really great traders apart from those who are average at best is the ability to cut a loss by making smart adjustments. Adjustments that reduce risk and extend the trading timeline.
In today’s show, I’ll cover the 3 option adjustment principles you should follow if you’re considering adjusting a short premium, option selling strategy like an iron condor, iron butterfly, strangle, straddle, etc. These guidelines will help make sure you’re always focusing on the most important aspect of trades adjustments which isn’t to make money, it’s to cut the size and magnitude of the loss down as much as possible.
Key Points from Today's Show:
- These adjustments are mainly used for short premium option selling positions; credit spreads, iron condors, iron butterflies, strangles, and straddles.
1. Always Take In A Credit.
- Credit reduces potential risk or expands out the breakeven points.
- If you are doing a two-sided strategy, it has to be for a bigger net credit than what you paid to adjust the other side.
- If you are paying to roll contracts or adjust a position, it does not make sense; at that point, you have to close the position and move on.
- Before you make the decision to adjust a position, make sure you are getting paid for it and reducing the risk.
If you have a $5 wide iron condor and you take in $1 of credit. If you take in a credit by adjusting that position and rolling one side closer, but you still maintain the structure, then you have gone from $1 credit to $150 notional credit. This reduces your risk from $400 to $350.
2. Never Move the Tested Side.
- You do not want to move the challenged or tested side because it will compound the loss.
- Instead, take what the market gives you and keep moving up the unchallenged side.
- Do not force a losing trade into a compound loss situation.
The stock is trading at $50 and you sell the $55 calls. If the stock starts trading higher from $50 to $55, one technique the people like to use is to move the call strike higher. They will close out of the $55 short calls and re-sell the $60's to give themselves more room for the market to move up against their position. However, this exposes you to another potential loss if the market continues to moves up. Instead, realize that that side of the trade might be the losing side and take what the market gives you and roll up the put side — move your $45 up to $50 and if the market continues to move up, move them from $50 to $55.
3. Extend Your Duration Whenever Possible.
- Duration defines the trading timeline.
- Whenever possible, you want to extend the amount of time that you have in the trade.
- This gives you extra time for the market to potentially move back into a profitable zone.
- Do not extend your timeline at a cost; extend it on a credit or at no cost.
Free Options Trading Courses:
- Options Basics [20 Videos]: Whether you're a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
- Finding & Placing Trades [26 Videos]: Successful options trading is 100% dependent on your ability to find and enter trades that give you an "edge" in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
- Pricing & Volatility [12 Videos]: This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We'll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
- Neutral Options Strategies [7 Videos]: The beauty of options is that you can trade the market within a neutral range either up or down. You'll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
- Bullish Options Strategies [12 Videos]: Naturally everyone wants to make money when the market is heading higher. In this module, we'll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
- Options Expiration & Assignment [11 Videos]: Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can't seem to get answered, then this section will help you.
- Portfolio Management [16 Videos]: When I say "portfolio management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. And in this module, you'll see why managing your risk trading options is actually quite simple.
- Trade Adjustments/Hedges [15 Videos]: In this popular module, we'll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we'll help you create an alert system to save time and make it more automatic.
- Professional Trading [14 Videos]: Honestly, this module isn't just for professional traders; it's for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.
Option Trader Q&A w/ David
Trader Q&A is our favorite segment of the show because we get to hear from one of our community members and help answer their questions live on the air. This week's question comes from David who asks:
In the Qualcomm strangle case at the 28-minute mark for the strangle and straddle adjustment video, you end up closing the trade for a loss of 28 cents, which was a smaller loss than you would have had before when the trade went against you. How do you decide between taking the small loss versus rolling out to the next month to try and get it back to a profit?
Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.
PDF Guides & Checklists:
- The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
- Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
- Implied Volatility (IV) Percentile Rank [3 Pages]: A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
- Guide to Trade Size & Allocation [8 Pages]: Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
- When to Exit/Manage Trades [7 Pages]: Broken down by option strategy we'll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
- 7-Step Trade Entry Checklist [10 Pages]: Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.
Real-Money, LIVE Trading:
- EWZ Iron Butterfly (Closing Trade): After nearly pinning the stock at our short strikes, and thanks to the volatility drop, we netted a $600 profit on this iron butterfly trade.
- VXX Short Call (Closing Trade): One of the most consistent and profitable options trades we can make is shorting pure volatility with VXX and today we closed this naked short call in VXX after a couple days for a $420 profit.
- DIA Iron Condor (Adjusting Trade): This neutral iron condor in DIA is need of a quick adjustment early this week as the market continues to rally. In this video, we'll discuss why I'm adding an additional put credit spread while also choosing NOT to close out of our current put credit spread due to pricing reasons.
- COP Short Put (Closing Trade): These single short puts in COP acted as a great hedge for our other bearish bets in oil this month and helped smooth out our returns after we closed them for a nice big profit.
- TSLA Put Debit Spread (Closing Trade): Although many people thought we were crazy for getting bearish in TSLA this pre-earnings put debit spread trade made us $200 today. After the huge run up from $140 to $260 and getting some technical sell signals, we were pretty sure this stock would pull back.
- MON Iron Condor (Closing Trade): Following a huge drop in implied volatility we worked hard to close this MON iron condor trade adjusting the order multiple times to fill before the end of the day.
- IBB Call Debit Spread (Opening Trade): We'll show you how I started searching for a new bullish trade and eventually found a low volatility trade in IBB looking for a move higher to hedge our portfolio.
- TLT Iron Butterfly (Closing Trade): Following the Brexit vote TLT and bonds traded in a nearly $8 range really quickly - even still the drop in implied volatility helped generate a $330 profit for us.
- XBI Call Debit Spread (Closing Trade): Got lucky picking the exact bottom for our entry in this call debit spread for the XBI biotech ETF which ultimately was closed for a profit of $165 today on the rally higher.
- COH Iron Butterfly (Earnings Trade): Shortly after the market open we close out of our COH earnings trade for about a $160 profit, leaving just 1 leg on to expire worthless.
- EWW Debit Spread (Closing Trade): Using some of the technical analysis signals we discovered in our backtesting research, we were able to make a quick $130 profit on this bearish EWW debit spread trade.
- IBM Iron Condor (Earnings Trade): Shortly after the market opened you'll follow along with me as we watch volatility drop and liquidity come into the market before closing out the position for $250 profit.
- SLV Short Straddle (Opening Trade): Using our watch list software we decided to continue to add to our existing SLV short straddle position with a new set of strike prices reflective of the move lower in the ETF recently.
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