Let us take two traders (A and B) trading ~90 day index ICs (or credit spreads) with a preference to exit the market 20-30 days before expiration. These traders make exactly the same trades and have the same comfort level and same trading philosophy, except when it comes to making an adjustment:
Trader A always uses the same adjustment method: close all positions at the same time or close in stages.
Trader B sometimes closes his positions and sometimes he uses other adjustment methods depending on his analysis in each situation.
In the long run, and under all kinds of different market conditions, I think trader B will achieve better results (higher annualised returns). The question is how much better?
Obviously, I am not looking for precise figures here, just some kind of rough data/information/comments that could help me decide for myself, if it is worth it (for me) to spend the necessary time to “master” one or more of the available adjustment methods.
Good question. However, the problem is not with ‘learning’ something new. Nor does it have anything to do with your ‘mastering’ anything special. We must look at ‘adjusting’ differently.
As to the final question, I believe that knowing how to ‘fix’ a good, but risky, position is a powerful earnings source. It remains important to exit trades that are not worth salvaging.
An Alternative Perspective
I often refer to ‘risk management’ as if it were separated from ‘regular’ trading. We enter into a trade as a first step, then when necessary, the original position is changed or adjusted.
Consider this perspective:
You own a blank portfolio – with no current positions. No risk. No possible reward.
Next, assume adjustment to that portfolio is made. Deciding that zero risk/zero reward is not what you want to own right now, you buy an iron condor. That trade adjusted (changed) the portfolio. You made a voluntary trade and added an acceptable level of both risk and reward potential.
I’ve described adjustments as having one purpose: risk reduction. In this scenario, the risk of having no earnings potential was reduced.
Two weeks later, you make another portfolio adjustment by opening a new position. Perhaps it’s a butterfly spread this time. This is another voluntary portfolio adjustment.
Most traders think of an adjustment as involuntary. In other words, they prefer not to make that trade. That is not a good mindset, and only applies when the trader has waited far too long and now has no alternatives, other than exiting the trade. I suggest looking at an adjustment (as it is usually defined) as a voluntary trade. You want to make this trade because it reduces risk and transforms the current position into another that you want to own.
From this perspective, making a position adjustment is NO DIFFERENT from opening a new trade.
When the adjustment is complete, you own a position that you want to own. Isn’t that exactly how you feel when making a new trade?
Thus, you do not have to ‘master’ anything. You only have to know when an adjustment is needed and recognize when a new trade is going to give you an improved position. I believe those are reasonable goals for any trader. Think of ‘adjusting’ a position as working on a partially painted canvas, whereas adjusting a portfolio by adding a new trade is working on a blank canvas.
Just as you make an effort to learn more details about trading your chosen strategies, so too will you learn a few possibilities for ‘fixing’ a troubled trade. There’s no need to be any more of an expert in making these trades than there is in making the original iron condor trade. It may be more fun to open a clean trade, but you will discover that the money is made by improving your positions. I do not believe there is any special edge in initiating iron condors. The edge has to come from good decision-making, and trade execution skills.
As you understand more about options, you gain a better intuitive feeling (but do NOT ignore the risk graphs or the greeks) for which trade type provides needed (even if not the absolute best) risk-reducing, profit-enhancing protection. It is worth the effort.
If you believe than an adjustment is another profit-making opportunity and not a nuisance that locks in a loss, then the whole idea of adjusting becomes so much less frightening and burdensome. It’s just an ordinary trade using options = to do what options do best: reduce risk and (if you elect not to exit) increase the chances of owning a winning trade(defined as making money from the time the adjustment is made).