Options Trading and the Importance of Adjusting Positions

I've been receiving comments and questions on the idea of adjusting positions – usually iron condors – that have become too risky to hold 'as is.'

Adjusting positions includes knowing when to exit the trade and lock in the profit, but all questions (to date) refer to adjusting when the position is in trouble.  This comment from Cliff is worth discussing.  Feel free to provide any relevant input from your own trading experiences.

When adjusting, there are many alternatives.  This post discusses   one of those ideas.



Today’s blog is very timely for me, as I am still “licking my wounds”
from the thrashing my IC positions took in August and September due to the big
(and unaccountable?) market upswing. I’m looking at position adjustment from
another angle and would like your thoughts.

My concept is fairly simple: As you teach,* on a portfolio basis I am
concerned with the Greeks more than the actual positions.

*I hope I don't teach this

Assuming I have a
satisfactory (to me) position in terms of gamma, theta and vega, but my delta
has been trashed by market movement, I “adjust” delta – and only delta – by
buying ITM call(s) or put(s), as circumstances dictate, with a delta of 100 or
about 100.

The adjustment requires a greater cash outlay than putting on
additional ICs or verticals, but far less cash/margin than buying/shorting the
underlying, and changes delta in extremely useful 100 point chunks per

If the market continues to move “against” the IC positions, the long
option(s) will increase in value at about $1 for $1 rate. If the market were to
reverse, which would serve to improve the IC positions, the long option is
simply resold for whatever loss it has incurred – a loss that will almost
certainly be less than would be incurred by the damaged IC positions.

Please let me know your thoughts on this practice. Thanks much, as


I don't like it.

1) This simple truth cannot be altered: It is difficult to trade positions with negative gamma, and we must pay attention to risk.

To compensate for owning such positions, you are paid a premium, in cash. Our job is to manage risk – and that includes delta and especially gamma – effectively.

2) I don't accept the original premise: The actual position is crucial and must be
managed with care.  The Greeks measure risk and provide the information
necessary to allow you to make intelligent adjustments.
  The Greeks provide vital information, but when traders are short call spreads and/or put spreads, and especially when they plan to hold this position for a period of time, I don't believe they can just watch the Greeks and ignore the position.

Because you plan to hold a position for weeks or months, all deltas are not really equal.  For example, if you buy a bunch of OTM options, you have plenty of delta and gamma.  And that gamma may come into play and provide a big payday.  But, as time passes when you maintain the same position – and you know it will because holding is the plan- then those OTM options soon lose a lot of their delta and gamma.  They become almost useless as protection against an iron condor position – unless the underlying asset makes a very large move.

The point is: when adjusting it's important to buy options that will help your position and reduce risk.  It's clear that buying options with 100 delta provides good protection.  But…

3) Buying options with a 100 delta doesn't do it for me and my comfort zone. Please understand – it may be just fine for you and I am NOT suggesting you do anything different, but your recent experience suggests that you needed to own some options with positive gamma. 

Before going further, let me say something important to all readers of this blog.  I provide opinion in these posts – and these opinions represent what I believe is excellent advice based on my (almost) 33 years as a professional options trader.  But, these are opinions, not facts.  If your comfort zone or intuition tells you to disagree, that's fine.  Think about my recommendations and then decide on your own whether they apply to you.

When buying 100-delta options, you gain no gamma – and it's the negative gamma that makes it 'too easy' to incur large losses.  Your call purchase is helpful in reducing additional losses, and does move dollar for dollar with the stock.  But, because of negative gamma, you continue to get shorter as the stock rallies and you may need to buy more calls as the stock continues to move higher.

In my opinion, reducing the need to buy more options is a very important part of keeping the position under control.  Consider the iron condor: we do not sell naked strangles.  Instead we buy farther OTM options as protection. Just as those options increase in delta – when we need those deltas  – so does buying additional puts and calls.  That's why I like the idea of buying pre-insurance.  You gain extra calls and puts at decent prices.

If the market reverses direction, you sell those recently purchased options at a loss.

Question: When do you sell them?  Do you wait (to sell) until the stock is significantly lower and you no longer need the delta?

4) There was a time when I hated  buying options for my retirement account, when those options had much time premium . Investors who adjust with stock, or 100 delta options, must feel the same way. I now believe that is an inefficient approach. When adjusting positions, there is more than delta to consider.

As a premium seller, I cannot anticipate earning all the premium that is sold. Thus, I buy insurance as needed, in an effort to keep losses manageable.
Obviously, you don't (currently) care about gamma, because it is at a satisfactory level. Re-think this idea about gamma.  You may change your mind.

Your results indicate that whatever you are doing isn't working. This was a very bad period for iron condor traders, and unidirectional markets always will be. Sometimes losses cannot be avoided.  But we must strive to eliminate large losses.  I don't need to know the details, but it seems to me that you held your iron condors, adjusting delta periodically, and refused to exit the position.  Although I recommend adjusting in stages, there is a point at which the position should not be maintained.  There must be a reasonable expectation (other than 'I cannot believe the market has advanced so far') that the position will be profitable going forward.  If it's just hope, that's not good enough.

We trade options to get an edge.  That edge is the ability to modify risk, as needed. That's something a stock trader cannot do without selling some of the position.  Thus, hoping, praying, begging, crying – none of these are helpful.  To maintain that edge, have a position that has a chance to work for you.  Take losses when necessary, sit on the sidelines when too bruised to continue, but when you do own positions, they should be positions from which you anticipate a profit.

Your decision is: do you want to protect against more of these unidirectional markets (as a bonus you get black swan protection), or continue to adjust with 100 delta options?

This is not a case of right and wrong. Your adjustment does reduce risk – and that's the main idea. But, do you hold onto bad iron condors (the strike price has been breached)?   If so, then that's the problem.

i do not believe you can prosper using that approach – unless the rally is large enough that both your long and short strikes move FAR ITM and you are simply naked long those extra options you bought.  It's not easy to continue to own and adjust a losing position, hoping the move will suddenly explode in your favor.

I prefer to own portfolio insurance [I prefer buying OTM options BUT ONLY when they are LESS OTM than my current shorts] – at the beginning, or as needed.  Because that insurance includes options with positive gamma, it can offset a decent part of those losses.

But at some point a position is not worth adjusting.  If you feel you are playing defense all the time, it's not a good position to own.


1) Don't fail to adjust

2) Many types of adjustment trades are viable.

3) If and when it's needed, you'll be pleased to own positive gamma.

4) It's not necessary to buy insurance/protection early.  It's okay to buy it later.


7 Responses to Options Trading and the Importance of Adjusting Positions

  1. Don 10/09/2009 at 11:08 AM #

    Hi Mark, really good article…Have a couple of questions for you.
    With regard to negative gamma. I know that you have mentioned before that this is dangerous and increases as expiry gets closer but don’t the odds diminsh as well that the outside condors are less likely to be reached? This is the tradeoff but is it really that dangerous or is it relatively danngerous from a mathmatical standpoint?
    With IV and the pricing of IC and DD you had mentioned that trading when the IV is high IC are the better vehicle and that DD are better when IV is low…but those are relative also…yes the IV affests the price, but it affects ALL four components realative to each other so that their relative profitabilty towards each other is the same?
    Smae with DD’s but it may be different because of the calender portion involved, doesn’t volatile IV affect the front month to a greater portion than the back month.
    I have difficulty reconciling “buying a spread” netting me money and “selling a spread” costing me money so I have just used trading a spread for ease of use.
    Today at 12 I ran a trade using the RUT December options Trading the 560/550 Put and the 650/660 call spreads according to TOS (think or swim) that trade could be executed with a net inflow of nearly 5.00 I know that you feel comfortable with +3.oo credits received with this spread is this trade something that you consider?
    Lastly I know that you would never hold to expiration but is negative gamma the main reason that you do not trade into the last week or is it rather that the cost of doing business, by closing out the open trades ensure the profit, removes the risk and allows you to look into your next trade?
    Thanks again,

  2. Don 10/09/2009 at 11:50 AM #

    Mark…in addition to the above I ran the following and traded in my paper money account
    Recieved 4.50 credit for the RUT Dec 560/550/650/660 IC trade with the following greeks:
    -Delta 12.70 Gamma -.85 Theta 31.01 Vega -164.52
    I aslo traded the following SPY bought 100/sh at 106.5 sold the Nov 107 call (2.98)and bought the June 105 Put (8.25) my greeks are:
    Delta 6.65 Gamma -3.16 Theta 1.60 Vega 20.12
    I am interested in how you would use these greeks to asses risk now and in the coming months note that the Greeks are sums of the individual positions.
    Using real words like…geez I have too much Gamma when that’s added to my Delta I’m gonna lose-LOL or something like that! Maybe geez my vega risk is really high I could lose ‘X’ if this happens…
    What are these greeks saying to you and your experience that I do not yet see?

  3. Mark Wolfinger 10/09/2009 at 12:16 PM #

    I am in a real quandary. Repliss to good questions such as these are very lengthy. And I know that fewer people read the comments than read the blog post.
    That means I spend a lot of time writing and few people see it.
    This, this reply will become a separate blog post.
    Look for it Tuesday, Oct 13, 2009.

  4. Don 10/09/2009 at 12:33 PM #

    Not a problem Mark, looking forward to your reply!

  5. Don 10/09/2009 at 12:37 PM #

    FYI the delta of the RUT is negative

  6. This is where getting intimate with the greeks really comes in handy, it’s well worth the time & energy imo. Im sure Mark will do a great yet challenging job of breaking down the positions relative to the greeks in their most simplist form to demonstrate what happens to your positions.
    Mark, pictures go along way in explaining things for some people. I know it made all the difference for me. For instance, you may want to show a graph(for otm options)that demonstrates how gamma increases as it closes in on expiration whilst depicting the increase in theta and compare thetas value with vegas value as this is all happening.
    Just trying to be helpful,

  7. Mark Wolfinger 10/09/2009 at 10:15 PM #

    It is a helpful suggestion and I understand the power of images.
    But I lack useful graphing software and that makes it very difficult for me to produce decent images.