Please consider this scenario: Stock is at 20$. I short the 20 put (1 month to go) for 0.25 , hoping for a bullish move. Stock goes up to 20.20 quickly, so assuming a -50 delta, the put goes to 0.15. So I purchase the 19.50 put as a cheap insurance, for... let us say...0.05. SO I have a bull put spread with max possible loss = .50 - 0.20 = 0.30 and max gain = 0.25 - 0.05 = 0.20. If the underlying continues to move, should I look for a new trade altogether, or is there a way to adjust this put spread to improve its risk/reward characteristics? The 19.50 - 20 - 20.50 put butterfly comes to mind, but anything else? Let us say for argument sake that I do get into this butterfly. Underlying continues to move past 20.50. Should I just look for a new trade, leaving the butterfly alone, or should I look to morph the butterfly into something else? What would that be?
I know you want to have a plan in advance and that is not a bad thing. In my experience, it is better to pick a price point that you want to make a change, then look at the current options prices and your expectations at that time, then make a decision how to proceed. You need to keep you mind open to the best trade at that time. Sometimes that is just to close it out, sometime to roll, sometimes to do something you might not have thought of before.