Date: 12/7/2022
Author: Chris Hood
I want to say I never make mistakes when I place my trades.
But that isn’t true.
I screw up like everyone else – sometimes placing orders with the wrong strikes or expirations. Thankfully, it doesn’t happen often, but I would be a liar if I didn’t admit it.
But once the trade is on, you must take actions to fix it.
Adjusting the trade can be relatively simple or highly complex in options trading.
Yesterday I turned two potential losing trades of $500-700 into two $20,000.00 winners.
I had some work to do, but my mistake with the expiration dates was exceptionally profitable.
The adjustment techniques were quite creative and extreme in these trades.
However, understanding a couple of fundamental methods might help you rescue your losers.
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Let’s start with rolling trades.
A roll involves selling the current contracts in a position and repurchasing contracts at a further expiration date and/or a different strike price.
If you’ve sold a bull put spread that is being threatened – the ticker’s price is approaching your short – you might want to roll it rather than close it.
You can roll it out in time if you believe the threat is temporary.
If you think lowering your strike prices will keep you out of danger, then you can keep the same expiration and roll the whole spread down.
Or you could roll out and down.
If the price is lower on the new contracts is less than the current ones, you’ll be able to roll for a credit to your account. If they’re higher, you have to pay for the adjustment.
Personally, I never roll anything unless I get a credit.
However, some traders will pay to roll if they think the trade will generate enough profit to offset what they pay.
The next method of adjusting a spread is to remove the short option.
I’ll stick with the bull put credit spread for this example.
Recall that this trade involves selling a short put beneath the ticker’s current strike price while simultaneously buying a put that is further in the money.
If the stock price moves up, or stays flat long enough, the spread will lose value.
You can let it expire worthless or repurchase it more cheaply and earn a percentage of the max profit.
Let’s assume that you have on a bull put spread when the ticker suddenly begins to take a nosedive.
Both options will go up in value, and the trade will likely lose.
If you are convinced that the stock price will continue to plummet, you can buy back the short option for a slight loss and hold the long put.
Should the stock fall low enough, the value gained on your long put can more than offset the loss of buying back the short.
These are just a couple of the adjustment possibilities.
I cover many more in our live trading room to help my subscribers minimize their losses and maximize their gains.
Hope to see you there soon.
Cheers
Chris Hood
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