How many adjustments you prepare to make for an options-trade?

Discussion in 'Options' started by OddTrader, Nov 9, 2010.

  1. The Option Trader Handbook (by Jabbour and Budwick):

    "As mechanical as option trading seems, to be truly successful you will need to apply your own artistic style with respect to the developing strategies and making trade adjutsmnets"

    How many (average and/or maximum) adjustments you (prepare to) make for an options-trade (with your main strategy)?

    " But I still wonder. Why are there so many option traders out there that aren’t making money? The answer you’ll hear the most is that your typical option trader does not know how to properly adjust an option position. This statement is somewhat true, but I think we can dig deeper.

    Recently I’ve come to realize the real problem. Option traders in general do not fail because of their adjustment strategies. In fact, most experienced option traders are excellent at money management and make very intelligent adjustments to their portfolios.

    The failure begins at the beginning of the trade. No matter how good of an option trader you are and risk manager, you will most likely never have long-term success trading options unless you learn to construct option trades that are low risk from the beginning. This is the key to becoming a successful option trader year after year.
  3. MTE


    Personally, I think adjustments to losing trades are just a way to avoid/delay psychological pain associated with taking a loss and admitting you were wrong.

    In reality, when you make an adjustment, all you are doing is making a new trade, which is in your mind connected to the previous trade, but it just a new trade with it's own set of risks and rewards. With that said, I believe that when you make an adjustment you should always think of it in terms it being a new trade.

    This line of thinking essentially means that you would never make an adjustment to a losing trade since the risk/reward you would be facing on the adjusted trade would always be worse than that on a new trade.

    So the question becomes, if you make an adjustment to a losing trade and the adjustment works then do you really come out ahead or are you just forgoing the return you could've made on a new trade!?

    On the other hand, adjustments to winning positions would always give you a better risk/reward ratio so it makes sense to make adjustments to winning trades, which allow you to take risk off (or at least reduce it) and/or increase your profit potential. However, you always run the risk that the trade goes against you and you end up breaking even rather than booking that profit you had prior to the adjustment.

    Just my 2 cents.
  4. Personally I have a very clear operational definition of a new trade . Depending on the volatility being dveloped, basically I prepare to have one major adjustment on each trade (either profitable or losing).
  5. Surprised that you guys discount the relationship between offsetting options and the positive returns you can get from that as opposed to realizing losses that you can save.
  6. Looks like you're assuming.

    There are too many (complex or simple) ways of adjustments. Many would be very much strategy-specific ones. Anyway, feel free to explore this issue on this thread, if you wish to.
  7. MTE


    Well, that's exactly my point. While you are trying to save your losses by adjusting you could've deployed the capital in a new trade and made more money there. It's an opportunity cost of adjusting/trying to save a losing trade.
  8. MTE,

    There's nothing wrong with your thoughts but I don't think that it's that black and white. There are a myriad of reasons for initiating a trade and adjustments can reflect a changing opinion (hope?). Saying that an adjustment is just a way to avoid/delay psychological pain associated with taking a loss and admitting you were wrong may be true but isn't always the case. Yes, the adjustment is a new trade... or maybe it's just the former position with a different risk profile? Toe-may-toe toe-mah-toe?

    Adjustments to an existing position change the risk profile. I don't think that one can categorically say that the risk/reward of an adjusted losing trade would always be worse than that on a new trade. Nor can one categorically say that adjustments to winning positions always give you a better risk/reward ratio because you can take profits out of a trade but increase the risk. So I think, it depends.

    Just my 2 cents in return :)
  9. MTE


    It's really late and I can't think straight anymore, but you are right, there is a gray area. Maybe it is more semantics than anything else...

    However, when somebody mentions adjustments I always think of people trying to find that magic wand, which would just wipe away their losses, and as we all know, there is no such thing...a loss is a loss, and an adjustment only works if the market works with you.

    Anyhow, different opinions make the market tick. The beauty of trading is that there's no right or wrong way of doing things, as long as it works for you...
    #10     Nov 10, 2010