management of losing/winning positions

Discussion in 'Options' started by daddy'sboy, Oct 17, 2006.

  1. Hi everybody!
    I hope you are all well and having some fun!
    I won't ask about recommended books, lol. Instead I want to ask about a topic I haven't seen on ET before (although I could be wrong, in which case Momoney will point it out :))
    Ok, there seem to be 2 schools of thought in regard to the management of option positions:
    1. set a predefined profit/loss/trail stop and close the position when stop is triggered - this seems to be the preferred method for the beginning to intermediate student (but I could be wrong) or
    2. adjust the position in relation to the market, i.e. roll, spread etc. (generally employed by the more advanced trader?)
    My question:
    Do the more advanced traders usually adjust? If so, why and did you go through method one first before arriving at method two?
    Any and all comments welcome :)
    daddy's boy
  2. MTE


    I find value in adjustments only when the position has moved in my favour and I want to take some profit or protect the profit.

    Whenever the position goes against me I find that closing out and taking a loss gives the best risk/reward, all potential adjustments yield inferior risk/reward ratios.

    Just my 2 cents.
  3. Hi MTE
    Thanks for your quick reply. Your philosophy is the one I've been following for a while also. However I'm now finding myself tinkering with the idea of adjusting losing positions (up to a point) knowing that rr will be worse but overall max position risk can be kept the same. So far, I'm only tinkering with the idea.
    daddy's boy
  4. MTE


    I usually go thru some possible adjustments when I have a loser on my hands, but every time I come to the same conclusion that my time, effort and capital would be put to better use if I just close out and move on.

    I don't know, maybe my view is flawed in some way and maybe some of the losers could have been saved by adjustments, but I just can't force myself to put on these "horrible" trades.
  5. That's very interesting. I suspect that there is a point beyond which any adjustment is too horrible to contemplate - a bit like a 'point of no return'. But there may also be a point at which a losing position can be adjusted relatively 'well'. As an example let's say I'm bullish on an index and have sold a put vertical. The underlying then starts to go against my position and I adjust by buying a put bwb for a small credit or even.
    I just wonder.
    Thanks for your input MTE.
    daddy's boy
  6. Some factors that can influence a decision are: the size of the position and the risk/reward.

    I prefer smaller position sizes with compelling risk/rewards, therefore taking a loss is not hard to do.

    If position sizes are larger and risk/reward is worse then it is much more tempting to make adjustments in order to defer any losses. The classic example is the high probability credit spread with 10:1 risk/reward.

    Any adjustment made should ideally result in a position that you would like to have. This is not normally the case with defensive adjustments; one is normally forced into a position for the sake of buying some time.

    A middle of the road pragmatic approach is to adopt an "adjust once" policy i.e. make one adjustment if the position moves against you and then if it continues to after that, simply close.

    As for managing winning positions, I will always look to see if there is merit in adjusting into another position that leverages existing inventory and potentially offers better risk/reward.

    2 cents.

  7. One way to minimize adjustments is to place trades with low risk/reward ratios.

    For example a high R/R play might be selling an OTM NP. If the Put goes toward ATM the potential for high loss is great and that threat forces many adjustments.

    OTOH, a low R/R play like an ATM bear call spread can be had for a 1:1 R/R. With such a defined, limited loss I am comfortable letting it ride. Many times I get a turnaround and would have kicked myself if I adjusted. I try and pick plays that have had a strong run in one direction and then trade assuming a reversal. Yes, there are more losers than OTM plays, but as long as your overall average is greater than 50% you'll do okay.

    It's a question of what you are comfortable with.

  8. Thanks momoney and Don - great food for thought.
    daddy's boy