Think of Adjustments as Brand-New Trades

Think of Adjustments as Brand-New Trades

This question comes up often in group coaching class and in my one-on-one option coaching sessions: How do you feel about adjustments? I personally do not have a problem with adjustments, but I often tell my students to think of them as brand-new trades. But that’s the problem. Most option traders cannot think clearly and honestly about adjustments.

Save the Trade

There are several things a person needs to do to become a successful option trader. The list is way too long to include here, but one of them is being able to make smart adjustments. Most option traders make an adjustment because the position is losing money. They want to “roll” the position, for example, to a new trade. They are in essence trying to “save” the trade. What I like to remind traders is that they are closing out a losing position and opening up additional risk. They often are confused about this. That’s because they are ignoring that they are closing out the losing position and only focusing on the new position, which could potentially wipe out the current loss.

Your P&L Does Not Care

What most option traders do not think about is that it does not matter to your P&L if you try to make up the loss on the same underlying or position. That does not mean you should never make an adjustment on a losing position, but many times looking elsewhere works better. The revenge component when a trade turns south is often the response for many option traders. How do you determine you are looking clearly at a legitimate adjustment and not fixated on so-called revenge? Look for another opportunity on a different underlying. It is easy and there is no doubt you are not enacting any type of revenge trade. Remember, your P&L does not care.

What’s Your Motive?

Before you make an adjustment on a losing trade, stop for a minute. Ask yourself, is this a well-advised move or is there another motive? If you are not sure or it is a “revenge” adjustment, it’s time to find another option or different underlying.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring

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One Response

  1. John, thank you. You are right, to often it is a “revenge” move (though I don’t feel revenge is quite right, it’s more like a desperate attempt to avoid a loss).
    In any event, as always good advice and food for thought.

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