Option Trade Adjustments

trading-tools-375Over the past six trading sessions, volatility in both equities and crude oil has expanded considerably due to the financial crisis in Greece and, to a lower degree, China. Coupled with the increase in volatility has been substantial moves lower in both equities and oil. On June 29th, the S&P 500 Index ($SPX) opened at 2098.63. Since that day, it has been in a freefall. Today the SPX dropped to 2044.02, its lowest point since mid-March before rebounding strongly at the end of the day to close at 2081.34. Oil has had a similar fate, opening on June 29th at $58.85 per barrel. Today /CL hit $50.58 per barrel before its afternoon rally, closing at $52.95. Although both of these benchmarks had strong closes today, they are still significantly lower than they were several weeks ago. When volatility expands rapidly and an underlying moves sharply against a position, it may be necessary to make a trade adjustment. Adjustments are one of the many tools that should be part of any trader’s toolbox.

Over the past two days, I have made a number of adjustments to existing trades in my portfolio. I will detail the adjustments to each trade below.

FXI – iShares China Large-Cap ETF

June 15, 2015 – Original Trade:

SELL 1 FXI Jul 15 48 Call @ 1.23
BUY 1 FXI Jul 15 53 Call @ 0.25
SELL 1 FXI Jul 15 48 Put @ 2.09
BUY 1 FXI Jul 15 43 Put @ 0.32
Credit: 2.75 ($275 per contract)
Max Risk: 2.25 ($225 per contract)

The breakeven points for this trade were located at $45.25 and $50.75. Anywhere between these two points at expiration result in a profitable trade. As with any iron butterfly, the closer the underlying price to the short strike ($48) at expiration, the greater the profit. Below is the original risk profile for this trade.


When the trade was originally placed, FXI was trading for $47.56. Today, FXI closed at $41.96, indicated by the yellow circle. This is well below the breakeven point of $45.25. With the collapse of China’s stock market, I do not expect that FXI will get back above $45.25 within the next 10 days when the options expire. At this point, it is all about damage control. If I do nothing and FXI stays at this level or declines further, I will have a full loss of $225 per contract. To reduce the loss, I rolled down the short 48 call to the 45 call. This allowed me to collect and additional $0.52 in premium which reduces my max risk from $225 per contract to $173 per contract.

July 6, 2015 – Trade Adjustments:

SELL 1 FXI Jul 15 45 Call @ 0.64
BUY 1 FXI Jul 15 48 Call @ 0.12
Credit: 0.52 ($52 per contract) / Total Credit Received: 3.27 ($2.75 + $0.52)
Max Risk: 1.73 ($173 per contract) on the downside and 4.73 ($473 per contract) on the upside

The new risk profile looks like this:


Obviously, the price of the underlying is well outside the profit zone, even after the adjustment. However, making the adjustment has resulted in a smaller maximum loss, which likely will be incurred on this trade.

FXE – Guggenheim CurrencyShares Euro Trust

June 22, 2015 – Original Trade:

SELL 1 FXE Aug 15 112 Call @ 1.77
BUY 1 FXE Aug 15 122 Call @ 0.03
SELL 1 FXE Aug 15 112 Put @ 2.30
BUY 1 FXE Aug 15 102 Put @ 0.21
Credit: 3.83 ($383 per contract)
Max Risk: 6.17 ($617 per contract)

When this trade was originally placed, FXE was trading at $111.46. The volatility was extremely high due to the unknown issues surrounding the Greek crisis. This resulted in rich premiums favoring the sale of an at-the-money straddle. However, due to the high capital requirement, the wings were purchased 10 points away on either side creating an iron butterfly. The risk profile for the original trade looked like this:


The Euro has been taking a beating as result of the Greek situation resulting in the underlying settling today right at the lower breakeven point of $108.17. Today I sold a second iron butterfly centered around the $107 strike.

July 7, 2015 – Trade Adjustments:

SELL 1 FXE Aug 15 107 Call @ 2.16
BUY 1 FXE Aug 15 117 Call @ 0.07
SELL 1 FXE Aug 15 107 Put @ 1.81
BUY 1 FXE Aug 15 97 Put @ 0..10
Credit: 3.80 ($380 per contract)
Max Risk: 6.20 ($620 per contract)

By itself, this new trade has an identical looking risk profile, except that it is now centered around the current price (indicated by the yellow circle).


The resulting position combining both trades now has a risk profile that looks similar to an iron condor:


Because this is a combination of two separate positions, the risk has increased and the potential profit has decreased (assuming that both positions are closed together). However, the breakeven zone is now from $105.68 to $113.31 with about a 51% probability of profit. Of course, all I am looking for is a small contraction in volatility, and I should be able to pull this trade off for a nice profit.

/CL – Light Sweet Crude Oil Futures, Sep-2015

July 1, 2015 – Original Trade:

SELL 1 /CL Sep 15 73 Call @ 0.10
SELL 1 /CL Sep 15 43 Put @ 0.10
Credit: 0.20 ($200 per contract)

This naked strangle was sold when crude oil was trading for $58.08 per barrel. The last two days, /CL has dropped precipitously. I typically try to maintain a delta neutral position with the /CL positions and will make adjustments to the trade quickly. I like the probability of expiring out-of-the-money for the short strikes to be as close to 95% as possible when placing the trade. In this particular trade, I chose to only adjust the untested side, rolling down the 73 call to the 64 call. I may still make an adjustment to the put side, but I was unable to roll down the put for a debit less than the credit collected in rolling down the call. If oil prices continue to slide, I will consider either closing the position, or making a more aggressive adjustment on the put side by selling two puts to finance the purchase of the current put.

July 7, 2015 – Trade Adjustments:

SELL 1 /CL Sep 15 64 Call @ 0.16
BUY 1 /CL Sep 15 73 Call @ 0.04
Credit: 0.12 ($120 per contract) / Total Credit Received: 0.32 ($0.20 + $0.12)

After making the adjustment, the risk profile on the ThinkOrSwim platform looks like this:


The trade now has a maximum profit potential of $320. I will plan on closing the trade once I can collect 25-35% of the maximum profit.

/CL – Light Sweet Crude Oil Futures, Oct-2015

June 29, 2015 – Original Trade:

SELL 1 /CL Oct 15 73 Call @ 0.11
SELL 1 /CL Oct 15 43 Put @ 0.09
Credit: 0.20 ($200 per contract)

Unlike the previous trade, by rolling down the untested call, I was able to generate enough additional premium to cover the cost of rolling down the put side as well. Although I was only able to roll the put from 38 to 37, I was able to neutralize the trade delta.

July 7, 2015 – Trade Adjustments:

SELL 1 /CL Oct 15 68 Call @ 0.17
BUY 1 /CL Oct 15 73 Call @ 0.10
SELL 1 /CL Oct 15 37 Put @ 0.31
BUY 1 /CL Oct 15 38 Put @ 0.38
Credit: 0.00 ($0 per contract) / Total Credit Received: 0.20 ($0.20 + $0.00)

Below is the risk profile after making the trade adjustment:


This trade is currently registering a $300 loss. One of the rules in my trading plan is that I will close a losing position when the loss exceeds $300. This is a situation where I have to evaluate the trade before making a mechanical trade decision. Looking at the risk profile, you can see that the price of /CL is right in the sweet spot. The only reason this trade is registering a loss is due to the significant expansion in volatility. When the trade was originally placed, implied volatility was 36.66%. Today, implied volatility for the October options is was at 49.19%. Although the loss may continue to exceed my “line in the sand” for the next few days or weeks, I will not close the position unless it continues to have an extended directional move.

Trade adjustments can be confusing, and, depending on your trading platform, may result in erroneous profit and loss results for the trade. I always keep track of the adjustments on a spreadsheet so that I know exactly where I stand on any given trade.

  • Jonathan

    Nice article and very detailed explanation of your adjustments. Good luck with your current trades.