Reading the new book “trading options for edge”. Fairly technical but about half way through now but hit on an adjustment for spreads that is so simple, why didn’t I think of that? Maybe even easier and more profitable than rolling or can at least scratch a trade.
For this to work you have to set up a credit spread that has at least 1 strike between them. For instance you could not do it with a 267.5/267 spy spread but you could do it with a 267.5/266.5. Also need to keep some cash ready for the adjustment.
So if your short strike is in danger of being breached, just buy a few options between the strikes. So say you had the 268/263 spy put spread and about to breach the 268 strike. Say you had 10 contacts, you could buy 3 or 4 of 265 puts and it would basically neutralize your gamma and delta risk. The other benefit is if it keeps moving once you are past your long strike would start showing a profit again because you are net long options and basically have a back ratio spread, just with tweaked strikes. Would work great on a day like today.
Worst case scenario is it stalls out after breaching your short strike but at least you have reduced the max loss a lot and if there is still enough time in the trade you may be able to scratch it for even.
As I said, duh, why didn’t I think of that. I have 8 different ways to adjust a losing credit spreads but this is probably the easiest and most effective. Much easier than diagonal, calendar, butterfly, BWB, back ratio or any of the other adjustments because you do not extend duration. It will all close out at the same time.
I will try it in a week or 2 once I clear out this round of trades. May intentionally set one up to blow up and see what happens.
I also was looking through past #spycraft type trades and the ones that were put on 21 or more DTE had better results than the shorter term ones. More time for a big move to reverse.
Going forward, these trades with be 21 or more DTE and if they need adjustment this will be the primary adjustment.