I don't see how "stops" in options trading have much to do with cutting losses, unless you are making directional bets of the underlying.... but even then you have other elements (time decay, vol etc.) to consider that can render "stops" more harm than help. We are not dealing with Futures, which "stops" are a must for risk/capital management. Most of the time spreads are put on and adjustments maybe necessary, but not "stops".
interesting....how do you adjust an open position such as a spread...can you put another spread on with different parameters to help hedge the first postion?
Adjusting a spread usually involves closing out the spread and opening a new one with different parameters. For example, a vertical roll. In reality you aren't adjusting the original position, you're cutting losses on the first and opening a new one to make up for those losses. the idea is that some time has passed and theta decay has helped you a bit. Also, the assumption is that if the underlying has moved against you that far, it is now more likely to reverse and your new position will be safe. The difference is trivial if your broker isn't charging a flat fee on each trade. If there is a flat fee, then it is much more beneficial to do the roll because you are placing one order instead of two. Thus you save yourself from paying the flat fee twice.
ahh....Thanks! Why can't more Option traders speak in this fashion?.. I think that Options Traders are delusional because Options have the reputation for being complex. So if an Options trader can speak complex, people think he is a pro or intelligent... I think Options are becoming more and more simple...don't give up readers...this is not that hard... Those theta, delta and other words and terms will become clear through example...as soon as I can get a fricken third-party signal!!! Michael B. P.S. Tell your friends that this thread is forming and being archived....we can write our own book here, for many to learn from....thanks again Cache 2028 views
Great analysis, Cache. Just to clarify what a 'vertical roll' is: This means to create a new spread with different option strike prices, but the same option expiration date or dates?
I notice this comes up a lot among Options Traders. They have all sorts of strategies to deal with their condition. Cooltrader attempted to over-simplify options trading early on in this thread. Sometimes these strategies get so complex the trader must sit down and examine what he is actually doing... Michael B. In reality you aren't adjusting the original position, you're cutting losses on the first and opening a new one to make up for those losses
Hey, it's a convenient way of convincing ourselves that we weren't wrong when we entered the position. Afterall, part of the strategy was to roll at a certain point. No harm no foul right?!? haha In all seriousness though.... these "adjustments" are a very useful tool and should be understood by all. And with regard to me speaking plainly. I speak options as a second language. I understand the concepts, but I might always sound like a foreigner.